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7/22/2014
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Microsoft Earnings: 3 Things To Watch

Wall Street has given Microsoft CEO Satya Nadella two thumbs up, so far. But with Windows growth uncertain and Microsoft's cloud businesses still in infancy, Nadella will face questions.

For Microsoft CEO Satya Nadella and Wall Street, the honeymoon shows no sign of stopping, even as the company begins implementing layoffs that rank among the largest in the tech industry's history. Nadella's predecessor, Steve Ballmer, never won favor with investors, but since Nadella took over in February, Microsoft's stock price has soared more than 20%, reaching its highest mark in a decade. What's more, as of Tuesday morning, the company's shares were up 6.5% this month alone, suggesting not only that shareholders approve of Nadella's restructuring, but also that the new CEO could have staying power on Wall Street.

But Nadella will still face questions on Tuesday when Microsoft reports earnings for its Q4, which ended June 30. Windows, Microsoft's traditional cash cow, isn't driving growth like it used to, after all; even though the OS runs on more than 90% of PCs, Windows controls only 14% of the larger device market, which also includes smartphones and tablets.

What other challenges must Nadella address as he faces investors? Here are three things we'll be watching as Microsoft closes its fiscal 2014.

1. Will Satya Nadella's "modernized engineering" drive results?
Over two-thirds of Microsoft's roughly 18,000 layoffs involve its Nokia acquisition. Those cuts were somewhat expected, given that Microsoft needed to not only trim Nokia's operations to fit within the Windows ecosystem, but also eliminate positional overlap. But that still leaves around 5,500 other layoffs -- a sum that alone would almost have qualified as Microsoft's biggest-ever job reduction. Among the non-Nokia eliminated roles, the most intriguing are arguably the relatively modest number within the Operating Systems group.

Nadella says he wants to "modernize" Windows engineering, and the first step appears to be downsizing not only the company's stable of dedicated testers, but also its reliance on contract employees. Before becoming CEO, Nadella drove similar initiatives within Microsoft's Bing and Cloud & Enterprise teams. Now, he argues the new structure will increase accountability, break down silos, and help Microsoft move as responsively as the startups to which it has increasingly lost both consumer and developer mindshare. Still, the change represents a major cultural shift for Microsoft engineers, as well the inevitable growing pains that come with it.

[Say goodbye to the old days. Microsoft Shows Tech 'Monopolies' Don't Last.]

Due to the layoffs, Microsoft expects to absorb $1.1 billion to $1.6 billion in charges over the next year, at least half of it related to severance and benefit costs, and the rest tied to asset-related charges. The company has not said, however, how much money it plans to save thanks to the reductions. As Nadella implements a new management model into one of Microsoft's key teams, many observers will be eager this week to see what kind of guidance the company issues.

2. Will Microsoft's cloud revenue grow fast enough to offset flat-lining Windows growth?
Microsoft will almost certainly announce strong growth from its cloud businesses, which already generate billions of dollars and have enjoyed double and even triple-digit percentage growth over recent quarters. Earlier this month, company execs said more than 57% of Fortune 500 companies

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Michael Endler joined InformationWeek as an associate editor in 2012. He previously worked in talent representation in the entertainment industry, as a freelance copywriter and photojournalist, and as a teacher. Michael earned a BA in English from Stanford University in 2005 ... View Full Bio

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MDMConsult14
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MDMConsult14,
User Rank: Moderator
7/25/2014 | 8:36:50 AM
Re: Expand the desktop/laptop franchise with compatible devices
Yes, leveraging mobile and big data to cloud is another area of Microsoft's strategy for growth. These expectations will see further improvements and it will revamp areas like Hadoop and analytics. The company is strong in cloud growth.
Brian.Dean
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Brian.Dean,
User Rank: Ninja
7/22/2014 | 7:02:36 PM
Re: Expand the desktop/laptop franchise with compatible devices
Microsoft could gain a share of the productive mobile market, if it invested in R&D and delivered a new kind of user input interface. This would be the equivalent of Apple's first line of touchscreen smartphones. Cameras have increased in resolutions and the Cloud enable massive amounts of computational power, maybe Microsoft would develop an analysis engine to detect keystrokes without a keyboard.
Brian.Dean
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Brian.Dean,
User Rank: Ninja
7/22/2014 | 6:49:43 PM
Re: RIP MICROSOFT
Agreed, at some point consumers are going to try to consolidate devices. It is already happening as the line between tablets and phones is becoming blurry, and consumers in emerging markets attempt to save capital by owning a single device that delivers multiple functionalities.

Productivity is a big concern, the device that offers a high level of productivity will maintain a stronghold in the market.
tzubair
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tzubair,
User Rank: Ninja
7/22/2014 | 5:18:51 PM
Re: RIP MICROSOFT
"Anyhow, especially with IBM and Apple are teaming up, I'm not sure it's so outlandish to imagine accessing sensitive databases on Apple devices. Android might be a different story."

@Michael: I think that may just be a psychological phenomena. I don't see how Apple's hardware or software is any less secure than Windows. Yes Apple-based servers are unheard of, but I don't sense any potential security issues.
tzubair
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tzubair,
User Rank: Ninja
7/22/2014 | 4:17:50 PM
Re: Expand the desktop/laptop franchise with compatible devices
"It's best prospect is to make a phone that's compatible with and useful with Office software; that is, expand the existing franchise. That will be a lesser market than mainstream consumer smart phone and tablet market, but it's one that it can master.  "

@Charlie: I think Microsoft has tried doing that but it has never seemed to work. Perhaps now when they also control the mobile platform through their own OS and the hardware too, they can fuse the Office applications and integrrate with the desktop. I'm not quite optimistic about it but this seems like a chance now.
Henrisha
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Henrisha,
User Rank: Strategist
7/22/2014 | 2:07:11 PM
Re: RIP MICROSOFT
I think Microsoft is still relevant especially when it comes to computer software. Also, what they're doing with the Surface tab is something to watch out for, so I would not count them out just yet.
Charlie Babcock
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Charlie Babcock,
User Rank: Author
7/22/2014 | 1:45:44 PM
Expand the desktop/laptop franchise with compatible devices
The gap in computing devices lies between those p;rimarily used for office work and those used as mobile, personal computing devices. Microsoft still has a lock on the office market and will for the next decade but it's lacked insight into the personal consumer device market. It's best prospect is to make a phone that's compatible with and useful with Office software; that is, expand the existing franchise. That will be a lesser market than mainstream consumer smart phone and tablet market, but it's one that it can master.  
Michael Endler
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Michael Endler,
User Rank: Author
7/22/2014 | 12:45:45 PM
Re: RIP MICROSOFT
Thanks for the thoughts, @anon.


You're right that it's somewhat misleading to lump smartphones, tablets and computers into a single "computing device" bucket, since, as you indicate, you can't use an iPhone and a Windows PC in the same ways. That said, in terms of ecosystem buy-in, there is some validity to the "overall computing" thinking, particularly as it applies to users in emerging markets. Also, I wouldn't blame the media for inventing the "overal computing" concept-- Microsoft was the one floating the 14% figure, and before that, it was the research analysts who were popularizing it. You can certainly quibble with the media's interpretation, however, including, say, over-emphasizing the extent to which Microsoft competes with Google, and under-appreciating the extent to which Microsoft competes with IBM or Oracle.


As for Windows and better enterprise management-- that's still true in broad terms, but I think it's becoming less true all the time. Windows isn't going to get driven out of the enterprise (far from it), but the range of workflows for which Windows is ulitized could be disrupted. Anyhow, especially with IBM and Apple are teaming up, I'm not sure it's so outlandish to imagine accessing sensitive databases on Apple devices. Android might be a different story.
anon4770296517
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anon4770296517,
User Rank: Apprentice
7/22/2014 | 11:37:48 AM
Re: RIP MICROSOFT
As Moore's Law continues to apply, it's not so clear what will happen with the PC market.  All the news media assumes that a "computing device" is the same market, that is, that cell phones are the same market as tablets which are the same market as PC's.  And nowadays, what exactly is a PC?  Is it a desktop system, is it a laptop, is it a hybrid tablet with a keyboard?  So the news media places Microsoft as a competitor with Google.  But they are also a compteitor with Oracle, which is software. They are also a competitor with Linux and Android.  But Linux has been freely available for several years as a free O/S you can put on your laptop, but sales of Chromebooks are minimal compared with Windows laptops and hybrid tablets.  Dell tried to sell a linux laptop for awhile.  As an MCSE, it is MUCH easier to control Windows clients and secure them in an Active Directory environment (think Fortune 500 businesses for those of you who don't have a clue what Active Directory is).  It is unlikely that Fortune 500 are going to let you access their highly secure company databases (like the H.R. system, the Accounting system, the I.P. databases), with an Apple/Android cell phone.  If they did they'd put their crown jewels at risk and triple the IT resources needed to support the required security.  

In reality, most eveyone in business will continue to have a cell phone and Windows business laptop/hybrid.  Cell phones now are getting to be so large it's hard to attach it to your hip, but if you have one then you don't need a separate tablet.  If you're like me you'll have a cell, a tablet or two or three, and a laptop, maybe a desktop too.
JohnD985
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JohnD985,
User Rank: Strategist
7/22/2014 | 10:10:27 AM
RIP MICROSOFT
Microsoft has ceased to be relevant.

Requiescat in Pace.
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