Go ahead and mark the time. Wintel is dead. In an otherwise good second-quarter report from Microsoft (Nasdaq: MSFT) -- Mr. Softy beat Street estimates by $0.03 a share -- revenue in the Windows division fell 6%. Intel's (Nasdaq: INTC) PC division saw a 17% sales increase over the same period, demonstrating some key differences in the Wintel relationship.
Both companies work with Apple (Nasdaq: AAPL), the only computer maker to record gains in 2011's fourth quarter, but only Intel is guaranteed revenue with every Mac sold. And that leaves Microsoft alone to figure out its place in an increasingly post-PC world.
Betting on the "enterprise" in a consumer-driven economy
You'd think Microsoft was set in a Star Trek movie for as much as executives talk about the "enterprise," an amorphous term that essentially refers to larger businesses that are willing to spend millions at a time outfitting data centers and personal computers with battle-tested software.
To a large degree, they're right. Microsoft's Business Division, which supports the Office suite of productivity software, produced $6.28 billion in revenue for fiscal Q2, a 3% increase over last year's second quarter.
And while the Windows division saw a revenue decline, it still accounted for $4.74 billion in sales. Yet it's the trend that matters in investing, and the Wintel divergence proves Microsoft's once-legendary stranglehold on the computing market has loosened.
What caused the shift? Changing habits, I think. For consumers, PCs have outgrown their traditional home on the desktop. Now we carry them in our pockets, purses, and portfolios. We also don't call them computers anymore. Instead, we refer to them as smartphones and tablets.
Two years ago, data traffic on mobile networks outstripped voice traffic for the first time. Roughly 400 million smartphone users accounted for that data deluge. Apple has sold at least 100 million more iPhones and iPads in the two years since.
Bill Gates must be cringing. He was talking up tablets and mobile computing years before Apple said anything about an iPhone or iPad. Yet over the past two years, Mr. Softy has been largely MIA from the market it helped to pioneer. Irony, thy name is Microsoft.
All of which leads me to the first reason you shouldn't cheer this earnings report. While Windows revenue was down 6%, operating profit for the group fell a more troubling 11% while the other twin tower, the Business Division, saw a 3% revenue gain cut in half on the profit line by lower margins.
Will Ballmer rally developers once more?
Lack of developer enthusiasm is the reason you should worry. Microsoft seems to know it, too.
"I would say one of the things [we] talked about at CES last week was just how important it is for us to work on and with developers to create a really vibrant developer ecosystem," said Bill Koefoed, Microsoft's general manager of investor relations, during the call with analysts.
He's right. Developers have more options than ever, and there's increasing evidence that they're writing for newer platforms such as Apple's iOS. And those who aren't writing for Apple are spending time creating Web-based apps. Last quarter, salesforce.com (NYSE: CRM) chief executive Marc Benioff told analysts that some 450,000 developers had built apps for the company's Force.com Internet-based platform for creating and deploying software.
A now-legendary video from several years ago shows Microsoft CEO Steve Ballmer sweatily rallying a crowd of coders at a company conference. "Developers! Developers! Developers! Developers!" went Ballmer's chant, accompanied by an audience clapping in tune. To listen to Koefoed's comments is to wonder whether another rally is in order.
There's certainly a need. While moves to unify all editions of Windows in version 8 -- due to reach beta next month -- should entice developers to spend more time with the OS, the changes are also long overdue, and they're coming as just coders are committing more time to other systems.
Making the call: Don't buy
For me, these twin forces add up to a compelling reason to avoid buying Microsoft right now. Yes, I realize a big dividend payout could substantially lift the stock. Yes, I realize the PC market is far from dead. Nevertheless, cracks are showing in Mr. Softy's foundational businesses. I see little chance that this stock will outperform the market while these problems remain unaddressed, and I've made a CAPScall to underscore my conviction.
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