Microsoft (MSFT) Gets A Second Chance

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A  look at the numbers for Microsoft’s last quarter would make most investors shudder. Revenue barely moved, up 2% to $16.6 billion. Net income was of 11% to $4.2 billion.

The world’s largest software company will cut 5,000 jobs.

The details are encouraging because, coupled with a deep recession, CEO Steve Ballmer may abandon some of the divisions that have been liabilities. In a strong economy, Microsoft’s tremendously profitable software business could support new, and often unsuccessful ventures. Redmond must be in the process of reevaluating that. If the firm’s sales suffer further though 2009, it will have to.

The Windows operating division of the company needs to do well. It has the flagship set of products. Poor PC sales and the unpopular Vista product pushed revenue in the so-called Client division down from $4.3 billion last year to $4 billion in the most recent quarter. Operating income also dropped from $3.4 billion to $2.9 billion. It would tax the memory to think of a time when this part of the company actually dropped in size.

The enterprise and business segments of Microsoft did better. Server software revenue was up from $3.3 billion last year to $3.7 billion in the current reported quarter. The company’s "business" division was only able to tread water with revenue of $4.8 billion. It was a sign that global IT spending is in a recession of its own.

The bad economy took a significant toll on the two parts of the company which have never done well. The devices operations which houses the Xbox and Zune had flat sales at $3.2 billion but operating income fell apart, down from $375 million in the last calendar quarter of 2007 to $151 million in the current report. In other words, after being assigned its share of Microsoft’s corporate overhead, it probably did not break even.

The most troubled part of Microsoft remains its online business. The loss in that division went from $247 million last year to $471 million in 2008. The company’s move to build a portal and search-driven internet presence is failing at a remarkably fast pace.

Microsoft now has little no logical choice other than to sell off its device business, perhaps to Apple (AAPL) or Sony (SNE). If it had a strategic value, it might be worth supporting. But, it doesn’t

As for Redmond’s internet operation, it is learning that the online portable business has little future. It should have known this by looking at Yahoo! (YHOO) and AOL. For Microsoft to support a search operation, it can put up a simple search box with nothing else on the homepage. It could look like Google’s (GOOG) . The MSN content staff could go away.

As for selling software which works remotely from PCs using Microsoft servers, software like the products Google offers, that business does not require a portal either. All Microsoft needs to do is decide that it will be more aggressive in marketing its software as products which does not require them to be downloaded onto the PC’s memory, and it has as good a chance of being successful as any company in the world. It already owns the customer. It just has to give them what they want.

The recession may be just the thing that MSFT needs.

Douglas A. McIntyre