Microsoft betting on ultrabooks to boost Windows growth

Microsoft has some interesting areas in which it hopes to profit in the future, and in a call with reporters and analysts after announcing its most recent financial results, Redmondian execs gave strong hints as to what’s worrying it now.

While the business division saw strong sales, the Windows team reported two per cent growth as PC sales stalled in the developed world. Part of this was due to the collapse in the sales of netbooks, which Microsoft has seen wither over the last year.

These developments aren't too surprising, since the tablet market is exploding and cannibalizing other areas. The only place PC sales are rising is in developing economies, and Microsoft doesn’t have a big share there – its software is too expensive.

During the call, CFO Peter Klein said the company was hoping that Intel’s forthcoming line of ultrabooks would help stem the tide somewhat. The new form factor could not only hurt Apple MacBook Air sales, but also spur the replacement market for laptops. A lot depends on what the first reviews say, but if the function is as tempting as the form factor, then Redmond might have a point.

Microsoft also sought to assuage concerns that the flooding in Thailand might cause problems in the ultrabook launch cycle. Western Digital has already confirmed that prices will have to rise following the flooding of its hard drive factories, and Canon has postponed a camera launch because of the floods, but the production of flash memory – essential for ultrabooks – appears unaffected.

Revenue storm clouds

On the cloud front, Microsoft’s figures look pretty good. There appears to be strong demand for Office as a cloud service, and the company reported that customers are buying more premium services – at least at this point – rather than the basic Office bundle. Eighty per cent of new customers bought Sharepoint and Lync, for example.

But Redmond warned that the move to online provisioning will see some significant changes in Microsoft’s revenue patterns. The cloud purchasing model means lower margins than Redmond is used to for shrink-wrapped software, but correspondingly higher profit margins. It’ll be interesting to see if this remains the case as Microsoft has to scale up support as the number of customers grows.

Another plus point Redmond reported was an increase in its consultancy revenues, as companies try to map out where they are going, and reorganize their business IT departments. Resellers and other partners are also going to love this, provided the right level of support can be given, and not too many customers get annoyed if service level agreements are missed.

Overall, the company said the take-up of cloud services exceeded expectation, but then again they would say that, wouldn’t they? Certainly Steve Ballmer was bullish about the services on Tuesday.

Google took issue with his claim that it was being beaten by Redmond in this area, but offered little in the way of evidence besides anecdotes. The next year should tell us a lot about how successfully Microsoft can transition its existing customer base in the face of Google Apps competition.

Skype everywhere

During the call, a lot of analysts asked about Skype, and it’s clear that Microsoft has massive plans for the platform. It has to – having splashed out all that money, a return on investment has to be seen.

Skype is going to be embedded in Lync, Windows Live, Xbox, and the Phone 7 platform. From the sounds of it, the development cycle is going to be very fast. No doubt an awful lot of work has gone into this already, and we can expect to see a lot of Skype buttons appearing on most of Microsoft products.

What remains to be seen is how well the integration goes. Skype users are currently holding fire on moving to the competition, but if Microsoft doesn’t get the integration right it risks losing billions in wasted investment.

Financial finagling

Microsoft made much of the fact that it had increased its dividend significantly this year, conveniently forgetting that in times gone by it wouldn’t have considered dividends something it did. But with the company’s share price barely moving for years, something had to be done to keep investors happy.

The company is still in the middle of a share-repurchasing scheme, and has over $11 billion to spend on its own stock. While this is good practice for a company expecting rapid growth, it’s not something that seems to do much for a company in Microsoft’s position – besides bolstering the share price.

The company’s other problem is overseas earnings. Microsoft is like many US firms in that it prefers to earn its money overseas and leave it there, rather than repatriate it – something that would require it to pay tax. At present $51 billion of Microsoft’s cash assets are overseas, not that short of Apple, and the company doesn’t appear to be bringing it back to the US any time soon.

Part of this is politics. There are moves in Congress to have a “one-off” tax holiday for firms to repatriate their earnings and invest in new jobs in the US. A similar “one-off” tax holiday in 2004 saw Microsoft and others bring huge amounts of money back into the country, and in almost all cases use it to pay off shareholders rather than invest. With the current US economic climate no one is investing in jobs here anyway, so the proposals look very much like a boondoggle for corporates, and Microsoft obviously thinks another holiday is coming.