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Microsoft by the Numbers: What You Need to Know About the Post-Ballmer Era


A numerical recounting of exactly where Microsoft is following CEO Steve Ballmer's retirement announcement.

Furthermore, the Surface unit was a major drag on profitability, courtesy of the $900 million write-down and its manufacturing cost.

And since we're on the profitability front, we must take a look at two widely-discussed drags on the company's P&L -- the Online Services Division and R&D Spending.

In fiscal 2013, OSD, which includes the Bing search business and MSN, generated $3.2 billion in revenue, up 12% year-over-year. That made it the fastest growing Microsoft business unit. However, it posted a whopping $1.3 billion operating loss.

The year before, the division actually lost $8.1 billion, including a $6.2 billion noncash write-down of its 2007 acquisition of aQuantive.

However, while OSD isn't a profitability powerhouse like standalone Internet companies such as Google and Facebook (NASDAQ:FB), the drag isn't particularly large -- about 4% in terms of net income, or $0.09 per diluted share for fiscal 2013.

That may actually not be a bad deal if Microsoft gains strategic benefits, like data collection.

On to R&D. Microsoft is often criticized for overspending here, primarily because of a somewhat unfair comparison to the uncannily-efficient Apple.

For the past three years, Microsoft has spent 13% of revenues on Research and Development, breaking the $10 billion mark last year.

By comparison, in the first three quarters of its current fiscal year, Apple has spent a relatively paltry 2.5% of revenues on R&D. The year before, that number was just 2.2%.

Google actually spends just a bit more than Microsoft. In the first half of the current year, Google has spent 13.6% of its revenues on R&D, which is in line with its practices over the past three years. Oracle (NASDAQ:ORCL) spends about 13% of revenues on R&D, while IBM (NYSE:IBM) is at about 7%

On the high-growth front, cloud pioneer (NYSE:CRM) is at 14%, and Facebook drops a whopping 19%.

Therefore, while I'm sure Microsoft's R&D spending can be made more efficient by eliminating some wasteful projects, there may not be a huge actual difference in bottom-line profitability.

If Microsoft cut $2 billion in annual R&D spending, it would increase EPS by $0.17, or 6.2%. It's not easy to say whether this modest increase in earnings would be worth the potential risks, like not being able to enter emerging software markets. For example, Microsoft has poured a mountain of money into its Azure cloud platform, without which it may be giving away a lot of business to the likes of (NASDAQ:AMZN) and Google.

The Xbox

The Xbox line of gaming consoles is often lauded as a key Microsoft success within consumer products, having gained a seriously passionate fan base and playing a major role in stabilizing Sony's (NYSE:SNE) perch atop the gaming business.

The original Xbox sold about 24 million units, which pales in comparison to sales of the Sony PlayStation 2, which sold over 155 million units. However, the Xbox 360 turned the tables, moving 78 million units to the PS3's 75 million.

That's a big catch-up, and with Nintendo's (OTCMKTS:NTDOY) Wii U not yet looking like it's going to make an impact, Microsoft is heading for a one-on-one battle with Sony.

The Xbox 360 caught Sony flat-footed by launching early with a low price.

That's not the case this time. News reports indicate each company's next console will launch around the same time in November, with Sony's PS4 carrying a $100 lower price tag.

Clearly, the playing field is more level, and in fact somewhat tilted toward Sony.

Additionally, remember that the Entertainment and Devices Division, within which the Xbox business lives, has never been a major profit driver for Microsoft. It lost money up until 2008, and its best year was 2011, when it contributed 4.6% of operating income.

Both Microsoft and Sony are likely to gain market share from Nintendo, but it's not clear what that means for the bottom line.

Adding It Up

The numbers bear out the following: Microsoft's Windows Business is coming under pressure courtesy of the slowdown in traditional PCs as tablets and smartphones take over -- markets in which it has minimal share.

The Office business is solid on the enterprise side, but consumer sales are waning courtesy of the PC slowdown.

And in terms of the potentially emerging markets, losses in Online Services more than wipe out profits from the Xbox and other Entertainment business lines.

This isn't a pretty picture.

However, that's not to say that Microsoft is completely down and out. Even with the challenges the core PC market is facing, Microsoft is an enormously profitable company, and its enterprise businesses like Server and Tools are performing fairly well.

Plus, while we may actually be getting to the point where calls for the death of the PC are coming true, Microsoft is nothing if not a survivor.

And it is fighting back, moving toward a subscription model for its software, as well as investing aggressively in cloud initiatives.

There's also the possibility that Microsoft goes on an IBM- or Oracle-like acquisition spree to beef up recurring revenues.

So while things look dark for Redmond, it's still in the game.

Do you have a thought? Let us know in the comment section below.

Twitter: @Minyanville

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