February 1, 2011
China is moving to non-Windows PCs. In most parts of the world, Microsoft's Windows sales track pretty closely with PC sales, except in the planet's biggest growth market. The ratio of computers on the street in China that are running something other than a fully licensed version of Windows is on the rise. Microsoft noted "lower Windows attach rates in China" as part of the reason sales of Windows licenses were off 30% last quarter.
The Chinese government is pushing open source computing in a number of sectors as a way to lessen the country's dependence on U.S. software companies. Also, many Chinese PCs are running pirated copies of Windows for which Microsoft never received a cent. Online losses continue to grow. Microsoft saw double-digit gains in its search market share last year, thanks in part to the Yahoo deal and improvements to Bing, such as direct integration with Foursquare. Despite that progress, the company's Online Services Division continues to operate at a loss, which grew to $543 million in the quarter. "OSD operating loss increased due to higher cost of revenue and research and development expenses," Microsoft said. The fact is, building a new search business carries significant traffic-acquisition costs. Microsoft for a time even tried to lure users to Bing with cashback rewards. No exposure to subprime mortgages. Like most big enterprises, Microsoft puts its cash to work through a number of investment vehicles, including the securities markets. But shareholders needn't worry that the company could be a victim of the next housing meltdown—its 10Q specifically stated that its portfolio "does not contain direct exposure to subprime mortgages or structured vehicles that derive their value from subprime collateral." ERP and CRM account for less than 3% of total sales. Microsoft aspires to be a major player in the enterprise CRM and ERP software markets. But its quarterly filing noted that its Dynamics products accounted for less than 10% of revenue for its Business Division, whose quarterly sales topped $6 billion on the strength of Office 2010. Some quick math shows that Dynamics, on an annualized basis, is likely less than a $2 billion business for Microsoft and accounts for less than 3% of total revenue. Bank account tops $40 billion. Microsoft continues to hold a fat bank account—cash, cash equivalents, and short-term investments were $41.25 billion as of Dec. 31. That fact has some investors griping that the company isn't being sufficiently aggressive in managing its money. Many argue that the time is right for a major acquisition that could give it a bigger presence in key markets. Names that have made the rumor mill include SAP, Lawson, and even Facebook. All in all, it was a solid quarter for Microsoft. Its $0.77 EPS blew past Wall Street estimates of $0.68, and, as noted, revenue came in at a record $19.95 billion. But investors still have their concerns. Microsoft shares have fallen about 3.5% since last week's earnings report as the industry still awaits the company's response to the tablet threat and more solid data on Windows Phone 7 sales. Microsoft is slated to release its next quarterly earnings report on April 20.
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