Microsoft's Struggles Grow: 9 Key Points

Redmond, we have a problem. Microsoft's $900 million Surface RT write-down was not the only troubling sign in the company's rough earnings report.
8 Free, Must-Have Windows 8 Apps
8 Free, Must-Have Windows 8 Apps
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4. Enterprise business performed well -- but still below expectations.

Hood attributed poor Windows sales to the ongoing PC slump, but she noted that Microsoft's enterprise products continue to generate high demand. The Business Division grew 14% relative to Q4 of last year, thanks to strong Office 365 and server product sales. But this growth included deferred revenue from an Office Upgrade Offer. With that sum omitted, the division's revenue grew by only 2%.

The Server & Tools division, meanwhile, grew 9%, thanks to strong performances from SQL Server and System Center products. Wall Street analysts had expected the division to grow by 12%, however, showing that in this quarter, even Microsoft's victories are tinged with disappointment.

[ Will price cuts make a big difference? Read Microsoft's Cheaper Surface Tablet: 8 Key Facts. ]

On the bright side, Microsoft recently announced that its data centers include more than 1 million servers, demonstrating that the company is willing to take on all comers in the cloud market.

5. Office 365 is doing great, but the larger Office business is a mixed bag.

When Microsoft announced Q3 results a few months ago, the company said Office 365 was on track to generate $1 billion annually. On Thursday, Microsoft said that its cloud-oriented, subscription-based version of Office is now on pace for revenue of $1.5 billion per year. The rapid growth represents fantastic progress, especially since recurring subscriptions will positively influence Microsoft's bottom line for years to come.

That said, Hood noted that the depressed PC market is hurting Office sales. As mentioned above, the productivity suite's revenues were somewhat inflated due to sales carried over from an Office Upgrade Offer. If this value, which totals almost $800 million, had been excluded from Thursday's report, per-share earnings would have dropped by 7 cents to 52 cents.

6. Microsoft is generating money from mobile phones -- but maybe not Windows phones.

Nokia, the primary maker of Windows Phone 8 devices, continues to lose money, but its recent earnings were still better than expected because of the strong performance of its Lumia handsets, which run Microsoft's smartphone OS.

As a result, Windows Phone revenue increased $222 million during the fourth quarter, though it's not clear how much of that is related to patent royalties Microsoft receives for Android devices. Even so, Microsoft has eclipsed BlackBerry as the third largest smartphone player. It's a long way behind Android and iOS, but Microsoft still has a foundation to build from.

7. Microsoft's OEM relationships are a mess.

Microsoft's OEM relationships have been strained since at least last year. Some partners didn't appreciate when Microsoft entered the hardware game with its Surface tablets. Almost all of them have abandoned Windows RT.

Shortly before Microsoft announced its earnings, Lenovo become the newest Win RT defector. The company's Yoga 11 laptop, which runs Windows RT and can switch between laptop and tablet modes, has been discounted. The company will continue to sell its Yoga 11s, a similar model that runs the full version of Windows 8. Companies including Samsung and Asus, meanwhile, are releasing Win8 devices that shift to Android when in tablet mode -- a clear sign that these OEMs have little faith in the Modern UI's current state.

8. Windows 8.1 needs to succeed.

Enterprise sales guarantee that Windows will continue to generate billions in revenue, but Microsoft needs consumers if it is going to maintain its industry-dominating stature. As a company, Microsoft has the resources to recover from rough quarters -- but on the consumer front, another holiday season of consumer indifference will really hurt.

It was always important that Windows 8.1 succeed -- but now that the Windows division's rocky quarter has been disclosed, it's clear that the stakes are even higher than previously thought.

Intel CEO Brian Krzanich said during his company's Wednesday earnings call that the PC market could pick up thanks to low-cost devices with Intel's new chips. Between the new products and Windows 8.1, Microsoft has a chance to rebound. If not, Steve Ballmer will be under more pressure than ever.

9. At least Microsoft has good company.

Yes, Microsoft's quarter was disappointing. But many other major tech companies are also struggling to adjust to the evolving mobile market.

On Thursday, Google announced profits of $9.7 billion, a 16% year-over-year increase, but still fell short of analyst projections. The company underperformed because more of its revenue is coming from mobile advertisements, which are cheaper and require Google to sell ads in greater volume. Apple, meanwhile, is contending with a saturated smartphone market, which might result in the release of a low-cost iPhone model, and the continued invasion of Android tablets into the iPad's market.

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Brian T. Horowitz, Contributing Reporter
Samuel Greengard, Contributing Reporter
Nathan Eddy, Freelance Writer
Brandon Taylor, Digital Editorial Program Manager
Jessica Davis, Senior Editor
Cynthia Harvey, Freelance Journalist, InformationWeek
Sara Peters, Editor-in-Chief, InformationWeek / Network Computing