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Can This Company Be Any Less Dead?

Monday - 1/7/2013, 3:08pm  ET

Certain sports lose their luster when marquee teams underperform. Baseball is not the same when the Yankees and Red Sox are horrible. Nobody watches golf unless Tiger Woods is competing. Likewise, college football is much better when Notre Dame is good enough to be hated.

Similarly, the stock market has never been the same since Microsoft lost its title as the bully of the tech sector. And as hard as it is for me to say, it’s time to stop calling the company a “sleeping giant” – expecting it to suddenly awaken. The body has been motionless for too long. And if the company’s Q1 earnings revealed anything at all - it’s time to call the coroner.

Is There Proof of Life?

The company didn’t get its fiscal 2013 started on the right foot. The software giant disappointed investors yet again by posting net income of $4.47 billion, or 53 cents per share, on revenues of $16.01 billion - missing both top and bottom line estimates. Not only did revenues decline by 8%, but the company managed to shed 22% in profits.

As a consequence, the stock continues to hover near 52-week lows of $26. The company has been too slow to adapt to several key growth areas such as mobile, where Apple and Google now dominate. Although Microsoft has attempted to launch competing products such as its Surface tablet and Windows Phone, device sales have been abysmal.

However, the company’s failures are much deeper rooted. For instance, despite the highly anticipated death of PCs, which has caused OEM partners Dell and HP to consistently underperform, Microsoft remain focused on its Office and Windows franchises. Unfortunately, the company also failed to anticipate the hit it would take in its Windows division, which posted a 33% decline in revenue.

With plummeting PC sales projected to reach the teen percentage points by the second half of the year, things are only going to get worse. Disappointingly, management has not been unable to position the company into higher margin growth areas such as the cloud, where rivals Salesforce.com and Oracle have become the dominant names.  

Et tu enterprise?

Essentially, as Microsoft is losing its position to Apple in consumer electronics, the company is also being skipped over in the enterprise market by a more nimble Oracle, which has been on a shopping spree. Oracle has been spending its cash on acquisitions such as RightNow and Taleo to help grow its cloud offerings.

These moves will allow the company to produce better profit margins in the coming quarters. Also, Oracle’s ability to post 17% growth in its software and subscription business means that the company is already stealing share from Microsoft. Making matters worse, Salesforce.com’s lead in the SaaS environment will prove insurmountable for Microsoft to mount any type of rebound.

What’s more, Salesforce.com has spent close to $1 billion buying up niche cloud/social media names such as BuddyMedia to make certain that its lead remains intact. Meanwhile, Microsoft’s management has instead opted to raise its dividend from 20 to 23 cents. Does the company understand that it is being outspent in growth end-market? Or does it care?

Also, for investors that are still waiting for Microsoft to “wake up”, ask yourselves, if Microsoft has been (arguably) at its worse during a period of perceived weakness for Apple, when will Microsoft ever wake up? It would seem that this is the perfect opportunity. However, Apple hasn’t really been down – although it’s a popular sentiment that the company is ceding its lead to Google.

However, the numbers tell a different story. Apple continues to dominate Google in U.S. smartphone sales – reaching 53.3% market share recently. This is according to a recent report by Kantar Worldpanel ComTech, which tracks sales data for the 12 weeks ended Nov. 25. 

Not only is this Apple’s highest share gain ever, but this is the first time the company has ever exceeded 50%. On the other hand, Google's Android remains the most widely used mobile OS in the world, and is still growing. Clearly Apple and Google are the two dominant tech companies in the realm of mobility.

Where does that leave Microsoft? The company has not been able to provide answers. And the street is beginning to lose patience. Unfortunately, patience is something that the company's board of directors has demonstrated too much in its analysis of the company's management team.

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