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Microsoft's Earnings Solid But Company Still Challenged to 'Establish Itself' Against Apple, Samsung, HTC
By Kimberly Koerth
January 27, 2014 - News
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Microsoft's second quarter earnings beat financial analysts' estimates as overall revenue grew 14 percent, but the software giant, which is trying to make a big leap in mobility, continues to face hurdles, according to Yankee Group.

The earnings increase comes despite increasing pressure in the mobile market, as and Microsoft has yet to name a successor to outgoing CEO Steve Ballmer.

The New York Times reported that Microsoft recorded overall revenue of $24.52 billion during its second quarter, which included the holiday shopping season, and net income of $6.56 billion, or 78 cents per share. This is an almost $1 billion increase in overall revenue with a 10-cents-per-share increase in net income from what financial analysts polled by Thomson Reuters had expected.

Sales of the Microsoft Xbox One gaming console, which was released last fall, drove sales figures but Microsoft also pointed out the success its second-generation Surface tablets enjoyed during the holidays. Revenue generated by the Surface more than doubled to $893 million compared to the previous quarter.

Still, these fiscal successes put Microsoft in the middle a dilemma, said Carl Howe, vice president of research for Yankee Group. Microsoft's legacy business of selling Windows and Office, which make up the vast majority of its revenue, remains so profitable that even success in new mobile technologies will force those profits to decline.

"When we look at Microsoft through the lens of new technology in mobile computing, the company’s mobile products -- its Surface tablets, Windows Phone OS and its soon-to-be-Microsoft-branded Nokia smartphones -- are still looking for footholds," Howe said. "The firm will have to invest tens of billions of dollars in marketing and development simply to establish itself as a viable alternative to today’s mobile leaders Apple, Samsung and HTC. Further, mobile hardware products don’t have the nearly 90 percent profit margins Microsoft sees in software; any hardware maker would be thrilled with profit margins that were a quarter of that figure."

As both consumers and businesses move to mobile computing, Microsoft's ability to keep turning out high revenue is uncertain. A decline in profits is inevitable, Howe said; it's not a question of if the company's profit machine will start declining, it's a matter of when.

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