 |
Microsoft today announced 3 new division presidents ostensibly to fill the voids left by the departures of Robbie Bach (Entertainment and Devices) and Stephen Elop (Business). However, it mostly looks like the temporary scheme which had the former direct reports to the division presidents reporting to Steve Ballmer has been institutionalized with some promotions:
In a statement this morning, the company said it is naming Kurt DelBene to head the Microsoft Office Division, Don Mattrick to head the Interactive Entertainment Business, and Andy Lees to head the Mobile Communications Business, effectively leaving things as they have been following the departure of Stephen Elop (who was named Nokia CEO last month) and the announced retirement of Robbie Bach.
…
DelBene’s group, which is focused on the Office set of products, is somewhat narrower in focus than the one vacated by Elop, which also included the Microsoft Dynamics line of customer relationship management and enterprise resource planning products for midsize businesses. The Dynamics business will continue to be headed by Kirill Tatarinov, who will report to Ballmer.
The moves essentially leave all of Microsoft’s businesses in largely the same hands they have been in. Lees and Mattrick have been running their units since Bach announced plans to retire in May. Following Elop’s departure, DelBene has been jointly running Office with fellow executives Chris Capossela and unit CFO Amy Hood. Capossela, the longtime head of Office marketing, and Hood will remain in their roles, reporting to DelBene.
And even more evidence that there is less here than meets the eye: the five business unit financial reporting structure will stay the same.
NPD and Morgan Stanley Research are reporting that notebook PC sales growth (monthly year over year) has been in decline since Apple’s iPad was released and now has gone negative. There are undoubtedly a number of factors at work, but the iPad is surely a major one. Best Buy CEO Brian Dunn “said internal estimates showed that the iPad had cannibalized sales from laptop PCs by as much as 50 percent.”
While this is certainly hard cheese for the PC makers, there is someone else who is taking it on the chin: Microsoft. Almost all of those laptops PCs that didn’t move were running the Windows operating system and many would pick up some version of Microsoft Office as well. Those sales have now vanished and when the Microsoft Windows and Office cash cows stumble, so does Microsoft. Stand by for some interesting earnings reports from Redmond.
Update: There’s a lot of skepticism about Best Buy CEO Brian Dunn’s statement and he’s now backpedaling rapidly without denying he said it. I tend to think it was simply a misstatement since the implied hit on notebooks sales is so much larger than the Morgan Stanley report would require. Speaking of which, a comment from the author of the Morgan Stanley article says that the sales figures showing the decline include netbooks. That is better news for traditional PC makers, but since most netbooks these days run Windows, it is cold comfort for Microsoft.
Microsoft today announced a major shakeup in the continually troubled Entertainment and Devices Division via a letter from Steve Ballmer to employees:
Robbie Bach and J Allard, founding fathers of Microsoft’s Entertainment & Devices Division, are leaving the company as part of a broader restructuring that will give CEO Steve Ballmer more direct oversight of consumer businesses including Microsoft’s struggling mobile unit.
The changes — a major management reorganization, even by Microsoft’s standards — will reshape the division leading the company’s battles against Google, Apple, Sony, Nintendo and other rivals in the hard-fought consumer technology market.
Bach, 48, president of the division since its inception five years ago, isn’t slated to be replaced. That will effectively dissolve the division’s current structure and leave the existing Xbox and Windows Mobile leaders to report to Ballmer starting in July.
….
Microsoft is describing Bach’s departure as a retirement. He said the decision was his own, and he wasn’t encouraged to leave. He’ll remain at Microsoft through the fall, to ensure a smooth transition.
…
Speaking with TechFlash, Allard said his decision was unrelated to the recent cancelation of the "Courier" dual-screen tablet project that he had championed inside the company. Allard said he doesn’t plan to work for Apple, Google or any other Microsoft rivals. After 19 years at the company, he said, he wants to devote more time to his personal interests, particularly adventure sports.
…
The separation of the Windows Mobile unit from the current Entertainment & Devices reporting structure also reflects the company’s efforts to connect its mobile initiatives with a wider range of products, including its online services and traditional software.
Don Mattrick, the senior vice president in charge of Microsoft’s Interactive Entertainment Business, will report directly to Ballmer as part of the management changes, as will Andy Lees, the senior vice president who leads the Mobile Communications Business.
Mary Jo Foley also notes some other changes:
Windows Web Services is born. Antoine Leblond, who has been Senior Vice President of the Office Productivity Applications Group, is moving to a new role: Senior Vice President for the Windows Web Services team. What is Windows Web Services? Good question. CEO Steve Ballmer’s e-mail describes it as “integral Windows services that today deliver updates, solutions, community and depth information for the Windows consumer.” Leblond will be reporting directly to Windows/Windows Live President Steven Sinofsky.
Office gets a new engineering chief. Kurt DelBene, Senior Vice President of the Office Business Productivity Group, is now head of all of the engineering responsibilities for the Office business.
Former Live Platform Services head David Treadwell moves out of the Windows division and into the Interactive Entertainment Business (the part of Microsoft that oversees Xbox and video games).
Xbox has finally started making money after the billions poured into it, but the Windows Mobile story was acknowledged even by Microsoft to be a vast missed opportunity verging on a disaster. Microsoft doesn’t like to lose markets where they used to have a commanding presence. The other entertainment products are yawners (e.g. Zune), but Mac Office is still a money maker and customers still love Microsoft keyboards and mice. Unfortunately they are the smallest and least visible part of the E&D menagerie.
Microsoft yesterday reported 2nd quarter financial results for FY 2010 (ending Dec. 31, 2009) and sales of Windows 7 have jump started the old Microsoft money machine that had been stalled last quarter.
Microsoft Corp. today announced record revenue of $19.02 billion for the second quarter ended Dec. 31, 2009, a 14% increase from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $8.51 billion, $6.66 billion and $0.74 per share, which represented increases of 43%, 60% and 57%, respectively, when compared with the prior year period.
These financial results include the recognition of $1.71 billion of deferred revenue, an impact of $0.14 of diluted earnings per share, relating to the Windows 7 Upgrade Option Program and pre-sales of Windows 7 to OEMs and retailers before general availability. Adjusting for the deferred revenue recognition, second-quarter revenue totaled $17.31 billion, and diluted earnings per share totaled $0.60 per share.
“Exceptional demand for Windows 7 led to the positive top-line growth for the company,” said Peter Klein, chief financial officer at Microsoft. “Our continuing commitment to managing costs allowed us to drive earnings performance ahead of the revenue growth.”
Windows 7 and Windows Server 2008 R2 launched globally on October 22 as anticipated. Through the second quarter, Microsoft has sold over 60 million Windows 7 licenses making it the fastest selling operating system in history.
“This is a record quarter for Windows units,” said Kevin Turner, chief operating officer at Microsoft. “We are thrilled by the consumer reception to Windows 7 and by business enthusiasm to adopt Windows 7.”
Taking a look at the quarterly results of each of the business units from the 10-Q filing:
Windows & Windows Live
Windows Division revenue increased due to strong sales of Windows 7 and PC market improvement. We estimate total worldwide PC shipments from all sources grew approximately 15% to 17%. OEM revenue increased $2.3 billion or 72%. Excluding $1.7 billion of revenue recognized related to the Windows 7 Deferral, OEM revenue increased $664 million or 21%, while OEM license units increased 22%. The OEM revenue increase was primarily driven by PC market growth, higher Windows attach rates across all regions, channels, and types of PCs and the restoration of normal OEM inventory levels, offset in part by PC market changes, including stronger growth of consumer PCs versus business PCs and of emerging markets versus developed markets. Other revenue increased $511 million or 60% driven primarily by strong Windows 7 retail sales.
Costs were up for Windows 7 marketing and yes, business is lagging consumers in both PC purchases and Windows 7 adoption rates, but it is a solid story albeit one that Microsoft wished they could have told when Vista shipped. Windows Live is apparently a fly speck.
Server & Tools
Server and Tools revenue increased reflecting growth in product revenue, offset in part by a decline in services revenue. Product revenue increased $103 million or 3%, primarily driven by growth in Windows Server, Enterprise CAL Suites and System Center revenue. The growth in product revenue reflects continued adoption of Windows platform applications. Services revenue declined $14 million or 2%, primarily due to decreased revenue from consulting services.
Server and Tools operating income increased primarily due to product revenue growth and a decrease in research and development expenses. Research and development expenses decreased $41 million or 7%, primarily driven by decreased headcount-related expenses and third-party development and programming costs.
Server and Tools is still in the doldrums and likely will remain there until there is a turnaround in the general economy. Meanwhile they are cutting costs.
Microsoft Business Division (mostly Office)
MBD revenue decreased reflecting decreased business revenue partially offset by increased consumer revenue. Business revenue decreased $231 million or 6%, primarily reflecting a decline in licensing the 2007 Microsoft Office system to transactional business customers, offset in part by a 1% increase in Microsoft Dynamics revenue. Consumer revenue increased $95 million or 12%, primarily as a result of growth in the PC market.
MBD operating income was flat reflecting decreased revenue, offset by decreased sales and marketing and research and development expenses. Sales and marketing expenses decreased $81 million or 7%, primarily driven by a decrease in corporate marketing activities and headcount-related costs associated with our corporate sales force. Research and development expenses decreased $64 million or 15%, primarily as a result of capitalization of certain Microsoft Office system software development costs.
Another division awaiting a general economic rebound. I don’t think Office 2010′s expected arrival in June will change the story in the same way that Windows 7 did.
Online Services Division
OSD revenue decreased as a result of lower Access and online advertising revenue. Access revenue decreased $14 million or 29%, reflecting continued migration of subscribers to broadband or other competitively-priced service providers. Online advertising revenue decreased $11 million or 2%, to $516 million, reflecting a decrease in display advertising and advertiser and publisher tools revenue, offset in part by an increase in search revenue. Foreign currency exchange rates accounted for a $13 million or two percentage point increase in revenue.
OSD operating loss increased mainly due to increased cost of revenue and decreased revenue, offset in part by decreased research and development expenses. Cost of revenue increased $171 million or 50%, primarily driven by higher online traffic acquisition costs. Research and development expenses decreased $49 million or 17%, primarily due to decreased third-party development and programming costs and headcount-related expenses.
OSD is in the red yet again and the fact that the decline in Microsoft’s old dial-up ISP business (Access) is material to the bottom line shows that it is still struggling. The only good news was that search revenue was up, but not enough to counteract the slump in display ads on Microsoft Web properties.
Entertainment & Devices Division
EDD revenue decreased reflecting a $295 million or 12% decline in Xbox 360 platform and PC game revenue. This decrease was due mainly to decreased revenue from Xbox 360 video games, decreased Xbox 360 consoles sold, and decreased revenue per console, offset in part by increased Xbox LIVE revenue. The decreased revenue from Xbox 360 video games was due primarily to the release of two significant games in the second quarter of the prior year. We shipped 5.2 million Xbox 360 consoles during the second quarter of fiscal year 2010, compared with 6.0 million Xbox 360 consoles during the second quarter of fiscal year 2009. The decreased revenue per console resulted from price reductions during the past 12 months. Non-gaming revenue decreased $59 million or 8%, primarily reflecting decreased sales of Zune digital music and entertainment devices and Windows Mobile device platforms. Foreign currency exchange rates accounted for a $49 million or two percentage point increase in revenue.
EDD operating income increased due to reduced operating expenses. Cost of revenue decreased $478 million or 23%, primarily due to lower Xbox 360 console costs, offset in part by increased royalties to partners related to increased Xbox LIVE transactions. Sales and marketing expenses decreased $75 million or 15%, primarily due to decreased marketing for the Xbox 360 platform. Research and development expenses decreased $50 million or 10%, primarily reflecting decreased headcount-related expenses and third-party development and programming costs.
EDD nearly tripled their profit compared to the year ago quarter despite reduced revenue. This was due to Xbox 360 cost reductions which is perhaps all that can be expected until the economic outlook improves. Sales of the Zune and more shockingly, Windows Mobile, didn’t help any.
Bottom line:
All in all, it was a solid performance by Microsoft given the economic conditions and the overall result beat Wall Street estimates with a mild boost to the stock price in after hours trading. Windows 7 could not have come along at a better time for Microsoft.
