Microsoft and Intel Disavow Fears of Doom

Over the past several weeks, it appeared the sky was falling for Windows and its longtime partner Intel. With PC sales falling more precipitously last quarter than analysts had originally forecast and IDC blaming it on disappointing uptake of Windows 8, we all were anxiously awaiting this week's earnings reports to hear from the horses' mouths themselves as to actually how bad things are now.

The good news is Intel and Microsoft didn't deliver even more dire reports or forecasts as feared. As it turned out they fared better than IBM, which sharply missed expectations with a quarter-over-quarter revenue decline of 5 percent, following last month's shortfall reported by Oracle and fears about Apple. IBM's miss was the first in eight years and doesn't bode well for other major IT players.

The bad news is Microsoft's decision not to provide an update on Windows 8 sales did little to refute IDC's Windows 8 claim, made last week. Noting that Microsoft sold 100 million Windows 7 licenses six months after it was released, the company's silence certainly raises questions, inferred All About Microsoft blogger and Redmond columnist Mary Jo Foley. It's no secret Microsoft is competing with itself with the popularity of Windows 7. Listening to Microsoft's earnings call last night, CFO Peter Klein, who is stepping down at the end of June, stated the obvious about Windows 8: The best is yet to come.

Now that Windows 8 has been available for six months, anyone not urgently needing a PC surely doesn't want to buy something that they know will be obsolete in a few months (I sure don't). Hence anyone who desires a "new" Windows 8 device (tablet, PC or hybrid) is going to wait for the Windows "Blue" to land on the high end systems based on Intel's next generation Haswell processor and on the low-end Bay Trail Atom processor.

Indeed the hardware out there from OEMs and Microsoft's own Surface RT and Surface Pro will clearly appear underwhelming if you stitch together the improvements the new devices will sport once they start to hit the market later this year. Klein suggested as much on yesterday's earnings call.

"We've always felt that with Windows 8 it was a process of the ecosystem really innovating across the board and really starting to see that on the chips," Klein said on the earnings call. "We're very encouraged by both Haswell and some of the Atom processors to really improve the overall user experience that Windows 8 delivers. And over the coming selling season, I think that's very encouraging and we're optimistic about that."

So here's my takeaway from Microsoft's third-quarter earnings report and investor call yesterday:

• Windows 8 systems are shipping at a weaker pace than it would like to admit but the company is bullish that a new crop of PCs, tablets and hybrids later this year will bolster the OS. Our own data shows Redmond magazine readers are deploying Windows 8 incrementally and will continue to go at that pace for many years.
• Microsoft's transition to the cloud is going well, specifically with Office 365. Office 365 saw an increase of five times this quarter over the same period last year and one in four enterprise customers are using it. Klein said the business is on a $1 billion run rate. While it may be cannibalizing traditional Office licensing sales, this is business Microsoft is not losing to Google, which nevertheless continues to gain momentum with Google Apps. "We expect our transactional customers to increasingly transition to the cloud with Office 365," he said.
• With an overall 11 percent year-over-year improvement in its flagship enterprise business -- Server and Tools -- multiyear licensing increased 20 percent, with Systems Center revenue up 22 percent and HyperV gaining 4 points in the market, Klein said.
• This week's launch of Windows Azure Infrastructure Services and Windows Azure Active Directory positions Microsoft to provide a solid public cloud offering and is poised to capture a major piece of the public cloud business. At the same time, Amazon Web Services will remain the market leader for many years to come, and Microsoft will also face a broad array of competitors in the public cloud from AT&T, Google, Rackspace, HP, IBM, Salesforce.com and those in the RedHat and VMware ecosystems.

As Microsoft looks to close out its 2013 fiscal year, it will no doubt be a challenging sprint to the finish line as the company continues to transition to new products and services. While Microsoft didn't knock it out of the park yesterday, no one thought it would. By virtue of the fact that Microsoft performed within expectations (depending on which consensus groups you look at it either slightly missed or slightly beat forecasts) and didn't drop any bombshells, the company can keep its head down for now.

Posted by Jeffrey Schwartz on 04/19/2013 at 1:15 PM