Exclusive update by Charly Travers
For all of the bearish chatter that Microsoft is yesterday's tech company and that Windows 8 is a flop, the company "somehow" managed to deliver record revenue of $21.5 billion in the second quarter of its 2013 fiscal year. Apparently consumers and enterprises still like and need Windows and Office. Microsoft remains a wide-moat business whose software is critical for businesses around the world.
An underappreciated component of Microsoft's software and services lineup is its servers and tools segment. This is the division that contains the technology and services that IT professionals rely on. The big trend that Microsoft benefits from is the massive collection of data by companies about their customers. This requires the construction of large data centers and the database software and business intelligence tools needed to analyze consumer behavior. With Q2 revenue of $5.2 billion, the servers and tools segment is almost as big as Windows ($5.9 billion) and Office ($5.7 billion; reported as Microsoft business division).
On the consumer side, Microsoft's Surface RT tablet looks to be struggling. The company did not release official sales numbers for the Surface, but market research firm IDC estimates 900,000 units sold in the quarter. That's well below the 22.9 million iPads sold. The launch of Surface Pro this month could improve Microsoft's standing, as the Pro offers beefier capabilities and access to all of the software that runs on a Windows PC. This could be very appealing to business users who want a highly capable tablet that's a lighter substitute for a laptop.
Over the next quarter, investors need to look at how well the latest version of Office, dubbed Office 365, sells. This is a cloud-based version of Office that can be purchased on an annual subscription basis. This gives users lower upfront costs as well as access to future Office upgrades. This is a sign that Microsoft is moving away from big product releases every few years, toward a model where its software will have smaller and more frequent updates. This is a smart strategic shift given the threat that Google's Drive poses to the dominance of Microsoft's Office productivity software.
At the time of publication, Charly owned no shares of the companies mentioned. The Motley Fool owns shares of Microsoft and Google. Motley Fool newsletter services have recommended buying shares of Google and Microsoft. Motley Fool newsletter services have also recommended creating a bull call spread position in Microsoft.