Thanks in part to the sixty-six million consumers who have purchased an Xbox and accessories, Microsoft (NASDAQ:MSFT) posted net income of $6.62 billion on revenue of $20.9 billion for the second quarter-ended December 31st. The world’s largest software firm continued to increase its cash on hand to $51 billion and fueled speculation that Microsoft might distribute some cash to their shareholders in the form of a special cash dividend. Another technology firm with plenty of cash on hand is Apple (NASDAQ:AAPL) who as of their most recent year-end reported $100 billion in cash which begged the question ‘what could they possibly do with all of that cash?’ Shareholders of both companies are hoping that the answer is to reward them for their patience and long-term loyalty. As Microsoft continues to maintain its dominance in their industry, experts are growing concerned about their mid-term growth prospects and a feature on Bloomberg reviewed the important contribution to revenue and profitability that the Xbox and Kinect technology have made to Microsoft’s bottom line.
Revenue And Profits From Software
Microsoft announced that in the past eighteen months since being launched, business consumers have embraced Office 2010 by purchasing 200 million units. The business customer remains a very important ally in Microsoft’s continued profitable growth for several reasons. First, their purchases are much larger than the consumer side of software sales. Second, businesses typically are better able to weather the economic storms that more easily impact consumers and often result in a slowdown in consumer spending. Third, business customers purchase software licenses which are multi-year revenue streams for Microsoft. The financial indicator that analysts often point to is Unearned Revenue which grew to $ 15.3 billion, the analyst consensus was for $15.1 billion. Unearned Income represents the future multi-year income from present day business customer sales. The improvement in business segment sales helped to buffer the loss from Windows division sales which saw a 6.3 percent decline to $4.74 billion. As the consumer PC market began to slowdown in 2011, so did sales of the number of machines with Windows installed on them. The decline is thought to be temporary, a report from IDC showing a 0.2 percent decrease in PC shipments for the fourth quarter is expected to improve in 2012, but the damage was done just in time for the holiday shopping season.
Microsoft Mobile And Tablet
One area of potential growth is the company’s effort to develop an improved mobile operating system that can be used on phones. Recently, Microsoft teamed up with AT&T (NYSE:T) to announce two new phones that will compete with Apple’s iPhone and Google’s (NASDAQ:GOOG) Android-based phones. The Android-based phone has enjoyed a 52 percent market share of smartphones and the iPhone has captured 37 percent of the user market according to Nielsen data. Microsoft lags behind with only 3.8 percent of the market and faces a huge challenge as it tries once again to get third party developers to create new applications that will run on Microsoft phones. The second opportunity centers on tablet devices. Microsoft is re-tooling its Windows 8 operating system to provide a more stable mobile computing platform for tablet users. Initial feedback from developers is that it’s much improved and had met expectations from a technical standpoint.
The Year Ahead
Microsoft has a long history of battling competitors that challenge its position, often smaller more nimble organizations that seize upon Microsoft’s seemingly slow, plodding approach to innovation and implementation. However, as anyone who has watched the technology juggernaut over the past several decades knows, don’t ever count Microsoft out. They may be down, perhaps a little distracted by all of the moving parts that need to be in sync to bring a new product or technology to the marketplace. But make no mistake, once they commit to being a player, all would-be competitors need to be on their best game if they want to remain in the action for long.