Friday, April 29, 2005

Q305 - Sugar Daddies Going Sour

A cautionary note from Joe Wilcox at the Microsoft Monitor in yesterday's post about the latest quarterly results (Microsoft Fiscal 2005 Q3 Results):

Important highlights: While server and mobile sales demonstrated healthy year-over-year growth, core Office and Windows division revenues grew just slightly, along with Business Solutions products. MSN year-over-year revenue declined, fed in part by declining Internet access revenues. I am somewhat disturbed by the slow growth or declines in three of Microsoft's four profitable business divisions.

When the divisional Sugar Daddies start running out of sugar, you can damn well better bet that things will go sour in other divisions first.

If you're in MBS, I'd really really get that resume polished and out and look for something interesting as soon as possible. You exist for the singular purpose of transitioning your customer base over to Office System based solutions. And as Mr. Wilcox notes about MBS:

I see no signs this division will achieve profitability in the near future.

Cut.

22 comments:

Anonymous said...

(I already posted this on one of your other threads, but it pertained to this exact topic. BTW, agree with your comments about Bus Sol - please tell me that someone's head is going to roll after yet another Q of brutal underperformance)

Rather than looking to subjective arguments pro/con how about looking at objective data like tonight's Q3 earnings report?

- Client growth = 2%
- IW growth = 2%
- MSN growth = -5%
- Servers & Tools = 12% (respectable)
- Bus Solutions growth = 3%
- Home & Entertainment growth = 12%
- Mobile growth = 31%

In other words, 3 of MSFT's 4 profitable divisions (including the two biggest) are showing either nearly flat or negative growth. In putting in its particularly dismal performance, MSN actually grew advertising revenue by a whopping 4% (I shit you not). What did GOOG and YHOO report again? Was that 50-100%+? Other "highlights" touted included Mobile's 32% growth. But hey, isn't the market itself growing at about that rate and didn't MSFT actually lose 5% marketshare despite that "growth"? (see http://news.softpedia.com/news/Symbian-is-more-popular-1509.shtml). Then there's Bus Sol - do these guys get the record for screwing the pooch or what? Let's see now, SAP as the dominant player in the mature end of the market reports 16 growth and these dickheads as relatively new players in a mostly untapped market grow by 3%? So much for Raikes' idiotic pronouncement that this would be a "10B division by the end of the decade" and kiss goodbye to any fantasy of this being an engine of growth or profitable anytime soon. Luckily, servers showed strength again albeit less so than last Q - at least MSFT is still firing on one cylinder. Of course, mgt ended the call with the usual optimism saying that next year growth will be better at ~10%. Is there anyone stupid enough to actually believe that? Sorry folks but this Q showed once and for all that the market was right and MSFT management is full of crap: GROWTH IS EFFECTIVELY OVER AT MSFT. Within 1-2 more Q's that's going to be apparent to all because Client and IW are going to continue breaking down. When Server fades too - as it almost surely will, then MSFT will head to the low teens. I think we know now why Connors left last Q and sold the bulk of his options at that time - his mama didn't raise no fools. Meanwhile, Ballmer/Gates tell the world that the future's so bright they've got to wear shades and mini's pleas for proactive change go largely unheard. Pathetic. Time to stop fighting the market and just short this POS into the ground...

Anonymous said...

Quote: "You exist for the singular purpose of transitioning your customer base over to Office System based solutions."

Why do you continue to spread this FUD? You linked to one analyst's write-up that, as an insider, makes no sense.

I'm also curious why you're so hard on a division that's only a few years old and is an amalgamation of several recently purchased companies.

Unlike you, I'm presuming, I've seen the future direction of the division and it's very exciting. There's a lot of hard work ahead and I'm hopeful, at least, that my team members DON'T take your advice and decide to stay put.

Here's hoping that in the years to come we can make you eat your words.

Anonymous said...

The new Microsoft mantra:

"I've seen the future direction of the division and it's very exciting"

Translation: Sure, we suck beyond belief currently on any measurable dimension but just wait until [insert future date here]. Once we get to that future date and results still suck, simply repeat statement above and insert new future date.

He's being "hard" on you when you take a larely untapped market opp and several well-positioned/growing companies and after just a few years turn it into flat growth and no momentum due to ridiculously stupid channel mismanagement and equally stupid freezing the market by prematurely announcing "project green"? Should dump the whole lot of you and buy SAP instead. It will cost a lot more but at least it will be a accretive and unlike Bus Sol, they actually perform.

Anonymous said...

Quote: "He's being "hard" on you when you take ... several well-positioned/growing companies..."

And then:
Quote: "Should dump the whole lot of you and buy SAP instead."

So the solution is to buy yet another company.

Amazing.

Anonymous said...

Well, let's see. When we buy companies, we screw it up. When we roll our own solution, we screw it up. Hell, when we just try and upgrade our current properties, we screw it up. We're just coasting on a lot of momentum from the past currently. Who the hell is running this ship anyway?

Anonymous said...

"So the solution is to buy yet another company."

I always love those who critize in a simplistic fashion but have no concrete suggestions themselves. If I were so inclined, I could answer with "so the solution is just keep screwing up and losing money?". No, the solution is not just to buy SAP and fuck it up too. However, strategically SAP is the best positioned/best executing entity in the space and profitable (read it would be accretive to earnings unlike Bus Sol). Also, if ORCL adds SAP to their shopping list, MSFT can kiss goodbye to ever being a significant player in this area. Now, if MSFT's only goal for CRM/ERP is to make it an Office delivery vehicle, then the impact of that is significant but not critical. On the other hand, if MSFT's move into bus apps is to find future growth and protect against the inevitable erosion of pricing power in the increasingly commodity businesses of Windows and Office, then that matters a lot. At the same time, MSFT needs to examine why it sucks so badly at integrating companies. Aside from Bill and Steve's gargantuan egos, a big part of it imo is this insistence on polluting every new venture by trying to graft on some legacy leverage mandate no matter how stupid that might be (i.e. worrying about how bus sol could be an Office-delivery mechanism vs concentrating on growing a successful and profitable ERP business). If it can't identify and fix those issues quickly, then leave the SAP entity as a totally seperate subsidiary. Either way, leave the SAP mgt team in charge of day-to-day operations because unlike the Bus Sol team, they've actually demonstrated an ability to understand and profitably dominate the market. Also, don't tell them what they'll put in their next release, if they need Office integration, let them tell you. MSFT is stuck in this self-inflicted downward spiral of refusing to fully embrace the future for fear of giving up the past and as a result, sucking at both. The best thing MSFT could do is break itself apart or failing that, leave the legacy/slow growth businesses under the MSFT symbol, and create a seperate entity/trading symbol for all the emerging businesses. That way, new ventures won't keep getting polluted by other unrequired mandates, will be out of excuses for not performing and will be out of business if they do because the MSFT mother ship cash bank will be closed. Similarly, maturing divisions will have to get off their ass an innovate for a change - or die. In other words, survival of the fittest - what a concept.

Anonymous said...

Quote: "I always love those who critize in a simplistic fashion but have no concrete suggestions themselves."

I was merely pointing out that your suggestion is to do the same thing we've done twice already. I already suggested that the division is headed in a strong direction and we should give it just a little more time; this was scoffed at as the same old rhetoric.

The cost of integrating new companies is high. The cost of technology instability is high. The cost of overplaying an unreleased project is high. Buying yet another company seems like a typical knee jerk and simplistic answer and make no mistake--it will have the same exact costs.

The suggestion to tear down a division just as it's getting its footing is short-sided and, as an insider, of the utmost frustration and one I take as a personal insult. Being constantly kicked because we aren't 10 billion in 10 years is tiresome (especially when it's my own fellow employees doing the kicking).

But, please, if you know something about the direction of the division that needs changed, speak up. Saying, "Bus Sol sucks so let's buy SAP" is nothing more than blogging drivel.

Anonymous said...

"But, please, if you know something about the direction of the division that needs changed, speak up."

Um, no, no don't do that. Not if you like your job and like getting a bonus every year. The fastest way to crater your career at MS is to open your mouth and question the direction of a division. No matter what your supporting evidence is, you will lose. Take it from an old pro.

Anonymous said...

"I was merely pointing out that your suggestion is to do the same thing we've done twice already. I already suggested that the division is headed in a strong direction and we should give it just a little more time; this was scoffed at as the same old rhetoric."

Try reading it again - the only similarity in my SAP suggestion was that it's an acquisition. As regards Bus Sol heading in a "strong" direction, wtf is that -sideways?

"The cost of integrating new companies is high. The cost of technology instability is high. The cost of overplaying an unreleased project is high."

No shit - but since the technology market is clearly maturing, and MSFT is seemingly incapable of developing profitable new divisions organically despite industry-leading R&D expenditures, they'd better get better at acquiring and integrating external ones and asap.

"The suggestion to tear down a division just as it's getting its footing is short-sided and, as an insider, of the utmost frustration and one I take as a personal insult. Being constantly kicked because we aren't 10 billion in 10 years is tiresome (especially when it's my own fellow employees doing the kicking)."

I don't see how folding all of Bus Sol into an SAP-headed entity is short-sighted. If anything, it would immediately make MSFT the player in the space and drive both revenue and earnings (unlike bus sol). Meanwhile, if what you guys are doing is so hot shit, I'm sure the much more capable/focused mgt team at SAP will be only too happy to incorporate it esp since your focus is primarily SMEs and theirs historically hasn't been. BTW, the $10B came from Raikes when he headed up the division - so it was your fellow employee who set this ridiculous expectation that you're now struggling under. But hey, he's busy bailing on his options as fast as he can, so he probably doesn't give a shit. Maybe your new leader should come out and set reasonable expectations? Nah, just keep reporting flat growth and telling everyone the future looks bright - trust us. That'll help the credibility of the division with customers/shareholder/the press.

"But, please, if you know something about the direction of the division that needs changed, speak up. Saying, "Bus Sol sucks so let's buy SAP" is nothing more than blogging drivel."

"if we know something"? How about 3% growth this Q and flat growth last Q? How about an even larger loss this Q than last? How about zero timeframe for when this division might actually show growth whatsoever far less the 30-50% growth required to start growing faster than the market and taking share from salesforce.com and others? How about the customers and partners dissapointed by the delayed CRM release and/or the functionality in the current products? Shit, why not narrow it down and just ask what's going WELL in the division? Is there anything concrete - or just your personal bullishness and the fact that bus sol hasn't yet reported negative sales?

"Saying, "Bus Sol sucks so let's buy SAP" is nothing more than blogging drivel."

Yes, and had that been what was said, it would be drivel. Instead, a more detailed and hopefully more thoughtful analysis was provided for why and how SAP should be bought and all sorts of data points on why bus sol isn't cutting it by any objective criteria. Unfortunately, you don't appear to like the message (no surprise there) nor be able to provide any data to support your opposing perspective. Instead, you appear to feel that simply saying "I've seen the future and it looks bright - honest" is sufficient. Don't know about you, but to me, THAT's drivel.

Anonymous said...

I recently saw a demo of CRM V2 and also small business product (Small Business Accounting) that ships in Office…. they are looking very good!! We should look to see how they do after launch this Fall. Also overall the customer adds were in double digits… that is what they said in the earnings call. Also I have heard that both Axapta and Navision products are growing at 20-30% in revenue. So I am not sure what is really going on with the 3% growth thing!! Maybe there is hope here …

Anonymous said...

What's that faint noise I hear? Could it be the first signs of real "accountability" finally creeping into MSFT's lexicon? The beginnings of snr mgt having to perform in their respective business units or actually face repercussions? The end of simply resting and vesting while giving endless excuses for failure? Gee, what a concept. If it is, looks like there's going to be a lot of senior dead wood departing in the months ahead...

"He (Gates) added that several senior Microsoft staff had placed their reputations on the line, offering assurances that Xenon would beat Sony's PlayStation line from its market-leading position.

http://business.timesonline.co.uk/article/0,,9075-1596214,00.html

Anonymous said...

Quote: "Unfortunately, you don't appear to like the message (no surprise there) nor be able to provide any data to support your opposing perspective."

When I said that the future direction looked good, I was implying that the current state isn't good, which is plain to see and I don't deny. But to be fair, by "direction" I was referring more to an internal perspective.

Externally, however, I thought Convergence went over really well and there seems to be some good messaging (read: sane) around Project Green, which is being well received.

By internal issues, I mean things like the cost of integrating new companies, the cost of technology instability, and the cost of overplaying an unreleased product. These issues, from my perspective, are finally squared up and I am, for the first time in a couple years, very excited about the future of our division.

We might not be performing like the company with 33,000 employees that you'd like to buy to replace us with, but I'm still bullish on our future.

Anonymous said...

Here is some detail behind the 3% total MBS division:

Positive Double Digit growth (Low-teen's%) YTD on new licenses+Maintenance. Positive Double Digit growth (high teen's%) on new customer adds YTD. Negative Double Digit(high teen's) in MBS services growth YTD. All this equal 3% growth top line.

We want our partners to do most of the services given we believe the SMB market needs of a strong and broad ERP services knowledge base provided by many companies out there.

That is VERY, VERY different to SAP. They love to have many expensive consultants in customer's accounts for as long as possible so they are able to pay for their high and fat cost structure (have you ever wonder how much MS pays for having SAP running our ERP needs??.. go and find out.. you will be horrified. One day I surely hope to be part of helping liberating MS from this nasty cost (by running ERP and CRM on our own stuff) so we take out of our cost structure the VERY big bill we pay EVERY YEAR associated with the SAP bits that live in our servers and you use every day.

So revenue growth for the division is shifting to the right place and that is a fact. Yes we have to do better than 3% top line.. That is for sure... New customer additions are the key metric and I like the YTD number trend mentioned above. As many happy customers as possible... that will be the name of the game to drive us to great profitability without the need to change the MS strategy from being low cost/high volume software provider to be a fat high cost/low volume SAP's, ORACLE's IBM's, SUN's, etc of the world.

So, unfortunately the 3% does not tell the whole story about the numbers. Can we do better (also telling the positive to the outside world) You bet!!! and in the best MS fashion we will do just that, despite the very little help from the many internal and external skeptics doing their casual and uninformed "Monday-quarterback" story telling.

Now, let’s go all back to work to continue making this company great!

Anonymous said...

Appreciate the extra detail but it only confirms that Bus Sol grew less on the Q than even SAP and far less than the market itself and key competitors such as salesforce.com. In other words, Bus Sol lost share.

Re the "moving services to partners" argument, yes I heard that last Q when Ayala used it to argue that sales "weren't really flat" despite the net result. I'm starting to wonder how many more Q's we can expect this excuse to be used (hopefully only two more max) and of course its impact is as great as it is only because license sales (at low teens growth) are as weak as they are. WRT to outsourced services being totally different to SAP, wrong. The vast majority of SAP installs are done using non-SAP resources and those partners are very happy to have this high-margin business. As such, they will continue to promote it which is problematic for MSFT because a) most know what they're doing in ERP (i.e. they weren't installing Windows Server last week) and b) in some cases, MSFT would like to recruit the same partners. Also, wrt SAP's "high and fat" cost structure, that's a bit comical given that many make the same argument about MS Office. Quite obviously, customers in both cases are seeing sufficient value or wouldn't pay the freight. Also, on this whole implicit argument about high-end/low volume vs low-end high-volume, the reality (as it is for MSFT) is that the top 20% of customers generate 80% of revenue. So, SAP and the others than you mention as occupying this high-ground, will be more than happy to do so and use that to fund their forays into SME - as MSFT itself does. That in turn seemingly leaves MSFT with the challenge of demonstrating that this high-volume market truly exists and doing so while competing against the likes of salesforce.com who will argue (so far very successfuly given their growth rates) that they and not MSFT are the true commodity-priced offering in that space. In any event, I do agree that Bus Sol has nowhere to go from here but up - or out. The former would be preferable of course, assuming it's possible within a timely fashion. Otherwise, time to put a bullet in it and either try a new approach (a la buying SAP) or simply drop it and enhance EPS by avoiding the continued losses.

Ahmad Aaron Christophorus Chen said...

it's amazing how much wrong information can be shoved in one uninformed post.

Appreciate the extra detail but it only confirms that Bus Sol grew less on the Q than even SAP and far less than the market itself and key competitors such as salesforce.com. In other words, Bus Sol lost share.

You comparing 2 different markets, do you know it? SMB market and LARGE company market are 2 different beasts. We're going UP from SMB and SAP is going DOWN from LARGE segment. SMB (small and medium business - in case if people not aware of abbrev.) cannot afford SAP - license/consulting/customization. No matter how big the partner base is for SAP, their costs are prohibitive for any SMB - and as such, we have a real shot. The fact that we didn't grow as much as YOU had hoped for doesn't mean it's all bad. Product is maturing, we/partners better understand the market and its requirements - it's all happening - albeit slower than YOU (again) hoped. But when you analyze it closer:

we're reducing our MBS services headcount (and associated costs) and relying on partners to do all the heavy lifting. Of course it affects our growth - but it GROWS the cottage industry that absorbs some of our profits. More partners using our tools = less partners using competitor's tools.

What metric would be satisfactory for all of you out there? Absolute dollar value? A positive cash flow? Can you estimate server sellthrough achieved by expanding MBS customer base? Can you estimate DevTool license growth achieved by expanding the partner industry (and each using Visual Studio/MSDN/Learning Center minting MCSE/MCSDs)? Tide lifts all boats - that's the trick here.

Last poster compares SAP cost structure with MS Office. How so? Company that wants to use SAP pays for licenses (comparable with Office) and for consulting (not even close in terms of cost with Office). Monies come from 2 different buckets and more importantly have different amortization structure. Ask around for costs associated with MS Office acquisition/install/maintenance and SAP costs.

Anonymous said...

It's amazing how many excuses can be pulled out to suggest that flat growth and increased losses is anything other than lack of success.

"You comparing 2 different markets, do you know it? SMB market and LARGE company market are 2 different beasts"

First of all, whether it's one market with numerous customer types/sizes/industries or numerous markets with the same, is subject to debate. For sure, it's not two just because you and a few others decided it should be. More importantly, SAP is not just a large customer solution albeit that they dominate that segment -(numerous M-sized enteprises run them also) and I used their growth to actually make Bus Sol look LESS bad. As I suggested, a more relevant player for SME would be Salesforce.com - and they outgrew Bus Sol by a country mile.

"The fact that we didn't grow as much as YOU had hoped for doesn't mean it's all bad. Product is maturing, we/partners better understand the market and its requirements - it's all happening - albeit slower than YOU (again) hoped."

MY hope? First of all, you barely grew at all and secondly, you didn't grow as much as your OWN mgt team hoped/forecasted - far less the rate required to actually gain share over your COMPETITORS even within the SME segment - or are you suggesting you did?

"we're reducing our MBS services headcount (and associated costs)"

Then how come you lost even more money on the Q?

"What metric would be satisfactory for all of you out there? Absolute dollar value? A positive cash flow? Can you estimate server sellthrough achieved by expanding MBS customer base? Can you estimate DevTool license growth achieved by expanding the partner industry (and each using Visual Studio/MSDN/Learning Center minting MCSE/MCSDs)? Tide lifts all boats - that's the trick here."

That imo is exactly the problem. So long as Bus Sol pollutes their mission with sell-through of non-Bus Sol products, you will always be a second-rate player at best. Bus Sol needs to focus on being the number one vendor of CRM and ERP in the SME segment and profitable - period. That means on a $ basis, on a license basis, on a customer acq basis, on a positive cash flow and net income basis, etc., and that means you'll need to grow at at least 30-50% in order to gain share. If while doing that, you pull along some other MSFT products, great - but that should be the icing.

"Last poster compares SAP cost structure with MS Office. How so? Company that wants to use SAP pays for licenses (comparable with Office) and for consulting (not even close in terms of cost with Office)."

The point was that high-cost does not necessarily equate to over-priced and indeed, the fact that many customers happily pay for SAP and Office (despite higher prices), suggests they get higher value in return. WRT to the relative costs of SAP vs Office, my first answer would be it's irrelevant since they address different problems, and to point out (just by the by) that an Office deployment costs a lot more than simply the license costs.

Anonymous said...

Good point. There should be no excuses and this business needs to grow at 30-40% in revenue. In fact there are parts of MBS doing exactly that. MS-CRM, Axapta, Navision and the small business stuff that is part of Office are all growing at these rates and have good future roadmaps. Everything else including Great Plains needs to be flushed. But the guy running the show used to be the CEO of Great Plains…. so you go figure out what this division’s real problem is!!

Anonymous said...

"so you go figure out what this division’s real problem is!!"

Accountability?

Anonymous said...

"Microsoft

Now here's an irony. I just typed "Microsoft" into the search box on our site, to see when we last mentioned the firm. The browser crashed.

The software powerhouse has market dominance, $10 billion sales, a $269 billion market cap and chests of cash, but Microsoft MSFT stock has been wandering the wilderness since 2002, quietly entering middle age in a price range between 24.00 and 30.00 that has gradually become more defined over time. You might even make money by going long when MSFT hits 24.00 and shorting the stock at 30.00. It fell into a small technical trap yesterday, between the 20-week moving average overhead and the 10-day moving average below, and that 20-day trendline looks like it might prevail. On the short-term chart, we see the powerful 80-day moving average has swept down to exert resistance.

Bernie Schaeffer recently described MSFT as "the poster child for what's wrong with Wall Street's infatuation with mega-cap blue chips." Infatuation is no exaggeration. Of 23 analyst ratings, just one recommends selling the stock. Of the rest, 7 say "buy" and the supposedly rare "strong buy" ratings number 14. While this looks good on paper, it does leave plenty of room for downgrades and little chance of any upgrades.

Remember, as contrarians we look for one of the following situations:

-- fundamental and technical strength amid pessimistic sentiment, as a signal that upside movement could be on the way if any significant good news comes along

-- fundamental and technical weakness amid optimistic sentiment, as a signal that downside movement could be on the way if any significant bad news comes along

MSFT certainly appears to qualify for that second bullet point. Though the stock performance is lackluster, the sentiment is strong. Aside from all those analyst ratings, the short interest is just 0.86 percent of the total float. Admittedly, the Schaeffer's put/call open interest ratio (SOIR) for MSFT is more pessimistic than 96 percent of readings taken over the past year, but it's still just 0.66, indicating 3 calls to every 2 puts in the front three months of options.

MSFT stock earns 3.0 out of 10.0 on our Schaeffer's Equity Scorecard, but that figure is updated every day and I've seen it touch 0.0. "

http://news.moneycentral.msn.com/ticker/article.asp?Symbol=US:MSFT&Feed=BW&Date=20050510&ID=4438622

Anonymous said...

The growth shown in Servers & Tools might be higher, and MBS lower, if MBS hadn't dumped the MBF on that division. Maybe MBS can offload Business Portal to IW to conceal more problems.

sdsef said...

Who da'Punk,
You've been at this for a year. I just found you today, so I'm still catching up, but i wanted to know how you feel a year later? Have things started changing for the better since you first blasted-off? How do you feel about the company's future?

Anonymous said...

WHINER! You should be ashamed of yourself, mini-me! What don't u go work for Google?