Microsoft needs to explain its plans for Windows and the declining PC market. Here are five key issues that require answers.
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Microsoft is scheduled to announce its quarterly earnings Thursday afternoon, following months of negativity from both Wall Street and the media. The barrage of bad press has included investment powerhouse Goldman Sachs downgrading Microsoft's stock to "sell" status, Windows 8's lackluster debut, and the PC market's continued decline, all factors that have led Microsoft's shares to appreciate at less than the stock market average since the software giant's ambitious Windows refresh launched in October.
Given all the doom and gloom, it might be surprising that analysts expect Microsoft to post year-over-year gains. British bank Barclays, for example, projects the company's revenue will rise to $20.51 billion, up from $17.41 billion during the same period last year, on the strength of strong server and business division sales. More bullish prognosticators have pegged Microsoft's revenue at as much as $21.65 billion. These estimates, though, don't detract from Windows 8's uncertain future. Some of Microsoft's divisions are performing well, but given that a quarter of its earnings come from its operating system, it's hard to know if the company is trending up or down.
Wall Street isn't always the best evaluator of tech prospects; Apple partisans would no doubt agree, for example, that investors' fickle attitude is a bit misplaced, given that Apple commands a disproportionately huge chunk of PC profits relative to OS X's comparatively modest market share. Nevertheless, Microsoft's relationship to the slumping PC sales has been a fixture in recent tech news, so there will be pressure on CEO Steve Ballmer to explain to stockholders how his company will weather the storm. Ballmer is famous for divulging no more than he intends, so time will tell how transparent company officials are feeling about the recent struggles.
Will Thursday's earnings be a celebration of Microsoft's increasingly diversified business, or another portent that its dynasty is ending? Here are five story lines to watch.
1. Will Microsoft Acknowledge That Windows 8 Has Underperformed?
Microsoft officials have stalwartly maintained that Windows 8's debut has been roughly on par with that of its record-setting predecessor, Windows 7. This assertion contradicts essentially every third-party appraisal out there; IDC and Gartner have both implicated Windows 8 in declining PC sales, for example, and there is evidence that the new OS's market penetration is not only worse than Windows 7's was at the same point but also losing steam.
The longer Microsoft takes to reconcile its statements with those of other parties, the more credibility Microsoft stands to lose among investors, developers and users. With both the TechEd and BUILD conferences coming in June, Microsoft will have additional opportunities to clarify its position and intentions, and to cultivate enthusiasm for its future plans -- but the longer the company waits, the more it cedes control of the Win8 narrative to outside observers.
2. How Is Surface Doing?
Microsoft isn't expected to drill down into specific sales data for its Surface Pro and Surface RT devices, an anticipation that, if borne out, tacitly affirms reports that the tablets have not sold particularly well. It would be particularly surprising if Redmond deviates from this expectation -- and even more surprising if it somehow asserts that Surface models have achieved widespread success. It's a bit more likely, however, that Microsoft might differentiate sales of touch-enabled devices from those of traditional PCs, or sales of Windows 8 from those of Windows 7.
Microsoft could, of course, remain mostly mum on this subject. But such data could be spun in many directions, making it a bit more palatable for Microsoft from a PR perspective. The data could also validate claims that a dearth of touch-friendly models contributed to Win8's weak holiday sales, and that the forthcoming variety of tactile-focused ultrabooks and tablets could lead the OS to rebound. That's assuming, though, that such favorable statistics are there to be gleaned in the first place.
In an interview, Gartner VP Stephen Kleynhans said there is "no question" the PC slowdown will hurt Windows. He countered, however, that Microsoft could dissect how its Windows 8 licenses have been dispersed. "The question is how many Windows license sales have been tied to OEM hardware sales," he said, adding, "Usually, it's been a high percentage." He predicted that Microsoft's willingness to increase the number of licenses sold without OEMs is "critical for [the company's] long-term health." Such a shift could yield many changes; given the directions Microsoft has gone with Office 365 and SkyDrive, for example, it's not impossible that Windows might one day be delivered via the cloud. Such predictions are speculative, but that could change if Microsoft officials are in a forthcoming mood.