They're all Dow components, after all. But after listening to Microsoft's conference call, the House of Gates' outperformance appears to stem from the slow emergence of its underlying strengths. The others, despite being strong companies, aren't showing revenue and earnings strength yet (except maybe for GE).
Before digging into a few of Microsoft's strong points, I'd first like to point you toward its second-quarter numbers, which have already been summarized nicely by my Foolish colleague Michael Olsen in our Fool by Numbers report from earlier today.
Microsoft's first advantage is the Xbox 360. Although component supply constraints caused sales of the gaming consoles to come in at only 2.5 million units, instead of the 2.75 to 3 million promised, there's reason to believe that everything will work out as planned. The company considers the component shortage a temporary problem, and it's adding a third contract manufacturer to keep up with demand.
But the sales of the Xbox 360 unit itself aren't as important as the sales of the Xbox Live service, games, and peripherals, which carry higher margins. The good news here is that the company is seeing higher sales of all of these items compared to those for its first-generation Xbox console. Xbox Live accounts are up from 10% of consoles to more than 50%. Furthermore, a record average of four games and three accessories have been sold per console -- nearly double the figures seen in any other console launch, including Sony's
Personally, I wonder how many Xbox Live members use the free "silver" account, compared to the subscription "gold" account. I think most subscribers will be drawn to the gold account for its multiplayer gaming capabilities, but at this point, I'm just guessing.
Other parts of the business are also doing quite well. The Windows Mobile and Embedded Device segment (including mobile phones and point-of-sale terminals) saw revenues increase by 40%; new products using the embedded device software will launch throughout the coming year.
Microsoft's most important figure this year will be the strength of its software sales in the second half of its fiscal 2006 and all of its fiscal 2007. The company's new SQL product enjoyed a strong launch, driving the company's Server & Tools revenues higher by 14%. Around the corner are Windows Vista, Office 12, Longhorn Server, and Exchange 12. The company still sees all these major items on track, although certain products such as Windows Vista have very loose time frames, such as the second half of the 2006 calendar year.
At the end of the day, the company committed to double-digit revenue gains for second half and FY 2006. That's more strength than other PC-industry players such as Intel
Further Foolishness from Redmond, Wash.:
- See Mr. Softy's second quarter by the numbers.
- Dueling Fools: Microsoft Bull
- Dueling Fools: Microsoft Bear
- Microsoft: Search Here, Get Paid?
Nathan Parmelee owns shares in Microsoft, primarily because they were fairly priced and he likes rising dividends. He has no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.