This is the third part of the overview of Microsoft for fiscal year 2009-2010 based in the content of the annual report for the period between 1 of July 2009 and 30 of June 2010. This annual report was published on 30 of July 2010.
General influencers in Microsoft’s performance
- Generally the highest quarterly revenue happens on the second quarter because of the corporate calendar year-end (licences) spending trends and holyday season spending by consumers (gaming)
- Entertainment and Devices division has of course a peak during the holiday shopping season (because all the Xmas presents, I guess)
- Global macroeconomic factors have a strong correlation to demand of software, services hardware, and online offerings.
- Technological innovation is the foundation of their long-term growth, where they face competition of other vendors of proprietary and open source vendors
- Last year revenues increased mainly because strong sales of Windows 7 and the PC market improvement in comparison with the previous year. It will be interesting to see what happens this year with the tablet boom.
Areas of growth:
- Cloud Computing: Microsoft considers this the next big wave of transformation with which computer will become a limitless platform to connecting people to information. In line with this vision, Microsoft has invested $8.7 billion in R&D and will dedicate 90% of their engineering force to cloud computing (from 70% last year). Microsoft has wide experience in cloud computing services with more than 15 years with Hotmail, 300 million people using Windows live sending 10 billion messages through Hotmail and MSN messenger, and more than 25 million subscribers to Xbox live. Microsoft will continue growing its online platform focused in consumers, service providers, enterprises and government delivering cloud solutions that span the complete range of business needs.
- Product portfolio advances: During the fiscal year Microsoft launched Windows 7 that sold 175 million copies by the time the annual report was out, Windows Live cloud services, Office 2010 with Office Web Apps with more than 9 million beta customers, IT professional services, Online Services such as Bing that gained 4 points of share, Windows phone 7, Internet Explorer 9 and, my personal favourite, Kinect for Xbox 360.
- Record financial performance: The last fiscal year Microsoft has reached a record of sales with an increase of 7% from the last year, operating income grew by 18%, diluted earnings per share jumped 30% and returned almost $16 billion to shareholders. Every business segment had double-digit grow during the last quarter of the fiscal year.
R&D and the future for Microsoft
Microsoft has been investing around 14.33% in average of its revenue in R&D during the last three years to support innovation focused in emerging technology trends and breakthroughs. The principal countries where R&D happens are US, Canada, China, Denmark, England, India, Ireland and Israel. There are four principal opportunities identified by Microsoft:
- Cloud computing: Microsoft wants to develop their cloud computing ecosystem to position their brand in virtualisation, management and security identity delivering end-to-end experiences to connect users in new ways through all their lives (home, work, mobile, etc).
- Natural interfaces: Microsoft has the feeling that there will be dramatic changes in how the users will interact with technology. That is the base of Kinect concept. Some examples are touch, gestures, handwriting and speech recognition. This change in “interaction paradigms” will make technology easier to manage, more intuitive and open new markets.
- New scenario innovation in key industries: There are some key industries in which Microsoft sees and opportunity to improve service and offer. Those are healthcare, environmental sustainability and education.
- Intelligent computing: Computing has been becoming intelligent since some time now, but Microsoft will continue investing in systems that learn about their users, its preferences and its past to anticipate its future to make them more productive. This is not really new now, but there is a lot more that Microsoft has to do to catch up in this.
Planned use of capital:
According to the annual report, Microsoft is planning to invest in sales, marketing, product support infrastructure, existing and advanced areas of technology, as well as additions to property and equipment. Existing cash, cash equivalents and short term investments together with new funds from operations will be enough to meet operating requirements, regular quarterly dividends, debt repayment schedules and share repurchase.
Microsoft is a huge company which has been asleep for a while in the comfortable zone of licences, which for sure is good enough money to develop a $Bs business. I am extremely glad to see this giant waking up and starting the engines that they have been warming up for several months already. The new mobile operating system, the awesome Kinect and, some days ago, the acquisition announcement of Skype make me think that we will see this giant giving battle in new fields for it. Looking at the four points of development in Microsoft’s future, I can see a clear advantage in the cloud computing exploiting online office, and in natural interfaces through the technology developed for Kinect which is starting to be expanded to many other applications.
Talking about revenues, the highest revenue stream still comes from licences, especially Office. What could be the future of it? It could be extremely tempting to develop official Office applications for other platforms such as iOS or Android because of the huge market that these two platforms could mean for the licences business. However, having them only for Windows is a great opportunity for differentiation for Microsoft´s OS in the market of for mobiles and tablets. I think that it is potentially their most important strength in catching up for the medium future and take a decent piece of the mobile platforms’ cake. Think about this, if you have used a Windows’ Computer with Office all your life, would you not evaluate the option of just having a phone and/or a tablet with the same OS and tools? It would be completely compatible from the core and there is no risk of fight with formats or communication among devices. I know, in the case of Office, other developers are already offering limited versions of Office compatible with those platforms, but a person without the confidence of deal with some technical complexity or a company that has Windows platform in all their system may take Microsoft’s choice. Imagine the Motorola Atrix 4G concept but using Windows… An still cloud office could be an alternative to capture some of the other platforms market.
The recent announcement of the purchase of Skype is impressive and really shows the compromise to offer better products to the consumers. The price they paid for Skype is extremely high, $8.5B which is about 400 times Skype’s operating income. This acquisition does not have the objective of generate more revenues to Microsoft by itself, but its real value is in the synergies that they can create with existing products. It will be a popular differentiator for Xbox, mobiles, tablets, etc. and bring benefits through those channels. Will Microsoft make it exclusive for their products as well?
All these are long topics that can take pages and pages each, but that will be in a different post.