MSFT - Microsoft

[texual]

Cool company. Cool stock. Continue to hold.

[Palantir]

This also means that it is possible MSFT will not break down financials by the different business divisions....because there are no different business divisions. Rather a hardware group that handles hardware for everything, an OS group which handles OS for everything, etc. Interestingly, Bing has been put into the same pile as Office, which is surprising to me but I don't know what their plans are...

[paologorgo]

Why Microsoft’s reorganization is a bad idea

http://stratechery.com/2013/why-microsofts-reorganization-is-a-bad-idea/

[VAL9000]

Why Microsoft’s reorganization is a bad idea

http://stratechery.com/2013/why-microsofts-reorganization-is-a-bad-idea/

 

I've got to disagree with this guy.  First his analysis isn't very detailed, but also I think he's just wrong to generalize such huge organizations into "divisional works, functional doesn't, except Apple, oh and the fact that every division is functional".  It's silly and ignores a lot of the reason behind why Microsoft is divisional in the first place, and why they are reorganizing.

 

Primarily he's overlooking the fact that Microsoft's last major reorg occurred while in the middle of a significant anti-trust trial, which ultimately resulted in a judge ordering that the company be broken up.  That was appealed, but Microsoft was clearly wanted to be ready for this.  Look at the dates:

1. Anti-trust trial starts May 1998

2. Microsoft reorgs into divisions March 1999 - http://www.microsoft.com/en-us/news/features/1999/03-29reorg.aspx

3. Judge orders breakup of Microsoft June 2000

 

Look at Microsoft's meteoric rise prior to this reorg, versus after.  It's been a tough decade-and-a-half.  No doubt Microsoft thinks they are ready to return to a functional organization where they were successful on all fronts.

 

The arguments that back up the thoughts here are bland, too.  "Divisional organizations have built-in accountability", "Divisional organizations have clear career advancement for generalists", "Divisional organizations have built-in performance incentives".  These are such weak reasons for not performing a reorg.  Who wants to advance a generalist?  How hard is it to hold people accountable in a functional organization?

 

And, this is nit-picking, but the author states "Apple is the exception that proves the rule".  This does not mean what he thinks it means.  It means it's an exception.  It doesn't prove anything except that his theory doesn't work in all cases.

 

Sorry to rip into that article, but it couldn't go unchallenged..  I'll offer some original thoughts of my own:

 

Now, when I first read about this reorg I thought it was a dumb idea.  The problem with reorgs is that nobody gets anything done while it's going on.  People are more concerned about where they land instead of what they are doing.  This reorg will definitely stall Microsoft's progress, but hopefully they are quick about it and people can get over it.

 

Now that I've had some time to think, I am pretty certain this is a good move for Microsoft.  My only real gripe is that they should have done this in 2009 when they had ample opportunity to jettison dead weight.

 

If you look closely at the differences in the org structure, they are:

1. Operating Systems Engineering - Windows group gets Windows phone OS, possibly other OSs

2. Devices and Entertainment loses phone OS, probably Xbox One OS, but gains Surface and other hardware

3. Applications and Services - probably the biggest change.  Office joined with Bing and other web services/applications.

4. Cloud and Enterprise - Server & Tools joins with Business division (without Office, Dynamics)

5. Dynamics gets its own group for whatever reason (spin off? sale?)

6. All groups lose their marketing, finance and advanced R&D autonomy

 

When I look at this new structure, I see a few things:

1. The focus has shifted slightly from divisional performance to product performance.  It's subtle, but there's freedom in not having your own P&L.

2. The alignment of product offerings to groups makes much more sense.  Windows and WinPhone should grow close.  Cloud services and Enterprise software should also grow close.  OS supports Cloud.  Apps is supported by both OS and Cloud.  The structure is a lot more elegant than last week's Microsoft.

3. Marketing gets a boost.  Microsoft has a brand problem.  They have for a long time.  It's good that this function will be coordinated and overseen directly by the CEO.

4. The overall change is the idea of one strategy.  Microsoft recognizes the need to extend their platforms as far and wide as possible.  For example, with divisional strategies, Windows' need to stay dominant would override Office's need to stay dominant.  Now the CEO is accountable for making bold choices such as "I'm going to sacrifice Windows sales by making Office available on the iPad".  It's the right move for the company, but would be very difficult to execute in a divisional organization.  Nobody wants to be the guy who ran Windows into the ground.

 

The best part of the change is that Ballmer will become much more accountable than he is today.  We'll finally get to answer the question of whether or not he's a good CEO.  The prior org structure did amazing things for earnings.  It did a lot less for innovation.  Time will tell if Ballmer has the sauce to make the bold decisions Microsoft needs to secure its future.

 

 

[Palantir]

I don't necessarily agree with the article's conclusions, but his analysis of Functional v Divisional firms is interesting.

[Kiltacular]

I've got to disagree with this guy.  First his analysis isn't very detailed, but also I think he's just wrong to generalize such huge organizations into "divisional works, functional doesn't, except Apple, oh and the fact that every division is functional".  It's silly and ignores a lot of the reason behind why Microsoft is divisional in the first place, and why they are reorganizing.

 

Primarily he's overlooking the fact that Microsoft's last major reorg occurred while in the middle of a significant anti-trust trial, which ultimately resulted in a judge ordering that the company be broken up.  That was appealed, but Microsoft was clearly wanted to be ready for this.  Look at the dates:

1. Anti-trust trial starts May 1998

2. Microsoft reorgs into divisions March 1999 - http://www.microsoft.com/en-us/news/features/1999/03-29reorg.aspx

3. Judge orders breakup of Microsoft June 2000

 

Look at Microsoft's meteoric rise prior to this reorg, versus after.  It's been a tough decade-and-a-half.  No doubt Microsoft thinks they are ready to return to a functional organization where they were successful on all fronts.

 

The arguments that back up the thoughts here are bland, too.  "Divisional organizations have built-in accountability", "Divisional organizations have clear career advancement for generalists", "Divisional organizations have built-in performance incentives".  These are such weak reasons for not performing a reorg.  Who wants to advance a generalist?  How hard is it to hold people accountable in a functional organization?

 

And, this is nit-picking, but the author states "Apple is the exception that proves the rule".  This does not mean what he thinks it means.  It means it's an exception.  It doesn't prove anything except that his theory doesn't work in all cases.

 

Sorry to rip into that article, but it couldn't go unchallenged..  I'll offer some original thoughts of my own:

 

Now, when I first read about this reorg I thought it was a dumb idea.  The problem with reorgs is that nobody gets anything done while it's going on.  People are more concerned about where they land instead of what they are doing.  This reorg will definitely stall Microsoft's progress, but hopefully they are quick about it and people can get over it.

 

Now that I've had some time to think, I am pretty certain this is a good move for Microsoft.  My only real gripe is that they should have done this in 2009 when they had ample opportunity to jettison dead weight.

 

If you look closely at the differences in the org structure, they are:

1. Operating Systems Engineering - Windows group gets Windows phone OS, possibly other OSs

2. Devices and Entertainment loses phone OS, probably Xbox One OS, but gains Surface and other hardware

3. Applications and Services - probably the biggest change.  Office joined with Bing and other web services/applications.

4. Cloud and Enterprise - Server & Tools joins with Business division (without Office, Dynamics)

5. Dynamics gets its own group for whatever reason (spin off? sale?)

6. All groups lose their marketing, finance and advanced R&D autonomy

 

When I look at this new structure, I see a few things:

1. The focus has shifted slightly from divisional performance to product performance.  It's subtle, but there's freedom in not having your own P&L.

2. The alignment of product offerings to groups makes much more sense.  Windows and WinPhone should grow close.  Cloud services and Enterprise software should also grow close.  OS supports Cloud.  Apps is supported by both OS and Cloud.  The structure is a lot more elegant than last week's Microsoft.

3. Marketing gets a boost.  Microsoft has a brand problem.  They have for a long time.  It's good that this function will be coordinated and overseen directly by the CEO.

4. The overall change is the idea of one strategy.  Microsoft recognizes the need to extend their platforms as far and wide as possible.  For example, with divisional strategies, Windows' need to stay dominant would override Office's need to stay dominant.  Now the CEO is accountable for making bold choices such as "I'm going to sacrifice Windows sales by making Office available on the iPad".  It's the right move for the company, but would be very difficult to execute in a divisional organization.  Nobody wants to be the guy who ran Windows into the ground.

 

The best part of the change is that Ballmer will become much more accountable than he is today.  We'll finally get to answer the question of whether or not he's a good CEO.  The prior org structure did amazing things for earnings.  It did a lot less for innovation.  Time will tell if Ballmer has the sauce to make the bold decisions Microsoft needs to secure its future.

 

Excellent and concise thoughts VAL9000

[Guest valueInv]

The clock starts ticking:

 

http://www.bloomberg.com/news/2013-07-15/microsoft-cuts-surface-tablet-prices-amid-weak-demand.html

[Guest wellmont]

The clock starts ticking:

 

http://www.bloomberg.com/news/2013-07-15/microsoft-cuts-surface-tablet-prices-amid-weak-demand.html

 

EquityNYC ‏@EquityNYC 14m

 

$900M inventory writedown on Surface??? Ouch. Glad I got out of that one. $1bn. MSFT should go buy Campbell's Soup instead of Surface/Skype

[Guest valueInv]

The clock starts ticking:

 

http://www.bloomberg.com/news/2013-07-15/microsoft-cuts-surface-tablet-prices-amid-weak-demand.html

 

EquityNYC ‏@EquityNYC 14m

 

$900M inventory writedown on Surface??? Ouch. Glad I got out of that one. $1bn. MSFT should go buy Campbell's Soup instead of Surface/Skype

 

Lovely, I'm sure rearranging the deck chairs on the Titanic will help  ;)

 

I sold out of MSFT recently too.

[Guest wellmont]

lets see windows mobile/kin, skype, aquantive, msn/search, vista, surface.....the list is growing.....

[Guest valueInv]

lets see windows mobile/kin, skype, aquantive, msn/search, vista, surface.....the list is growing.....

 

Thats ok, at least they are innovating ;)

[texual]

I highly doubt they are done with Surface. This is only the first generation. After smaller forms, better chipsets and updated software begins to hammer out the flaws, I think Surface can be really successful.

[Guest wellmont]

I highly doubt they are done with Surface. This is only the first generation. After smaller forms, better chipsets and updated software begins to hammer out the flaws, I think Surface can be really successful.

 

yeah but it now is obvious they were using customers to beta test their first tablet/laptop. the reviews were awful. they knew it was awful yet they put it out there anyway because they needed to practice. you are right. they will continue to poor money into hardware. this company's investment record is terrible.

[texual]

They did the same thing with XBOX which took a massive loss, and the Xbox360 took a billion dollar write down too... They continue to iterate and build the best entertainment device, (also Kinect) and were able to match up neck and neck with Sony PS3, which had two full generations of consoles ahead of MSFT. So I don't know what to say to anyone who doubts these guys.

 

There is something to be said for the Surface taking a write off but to be honest, it was a risky experiment to begin with. And I don't mind them taking the loss provided they pick up the pieces, build a smaller, lighter, sexier device and market it better.

 

They should be in the hardware business.

 

They SHOULD buy Nokia's hardware ability.

 

I think software has hit a wall, in many ways. The mobile paradigm is solved by developers making Apps. They are the ones making the mobile experience awesome, and connecting people and just pushing the platforms! Not the operating system makers - Apples iOS has hit maturity, it has to be changed, but they only made a few cosmetic changes. Android is all but feature paired with iOS and is mostly sold as a different skinned theme from the manufacturers. I don't think OS software is going to be different between the big players, unless you are Blackberry which has a lot of catching up to do (doubt they can make it).

 

The next few years of tablets and phones will be sold to customers on the basis of their hardware design and capabilities.

Like the camera technology and the screen size, quality or industrial design. I wouldn't be surprised if more materials become normal on phones like premium polycarbonate, wood, special glass types.

 

Hardware is where its at.

 

Its why Google bought Motorola, and why Microsoft built Surface, and wanted to partner with Nokia. I think we will see more hardware coming, and it will get way better.

 

The 2000's were a setup for software advances, the late 2000's were all about building the mobile paradigm and I believe we have found a good medium. The innovation comes from the developer community that builds apps on those platforms. The hardware is where those devices will be sold to customers.

[Palantir]

yeah but it now is obvious they were using customers to beta test their first tablet/laptop. the reviews were awful. they knew it was awful yet they put it out there anyway because they needed to practice. you are right. they will continue to poor money into hardware. this company's investment record is terrible.

 

Hold your nose and look the other way.

 

Anyways, I thought the earnings report was good. Strong growth especially in S&T and Bing. S&T is going to be a big engine, and this coming year, I think Bing may come very close if not actually hit profitability.

 

Balance sheet is a beast, 77B in cash, 10B in investments, if you net out the debt, liquid assets of 72B!. If you assume all the cash is abroad and give it a haircut of 30%, then it gives 50B. So basically, a no growth state is giving you a 10% return.

[Guest valueInv]

They did the same thing with XBOX which took a massive loss, and the Xbox360 took a billion dollar write down too... They continue to iterate and build the best entertainment device, (also Kinect) and were able to match up neck and neck with Sony PS3, which had two full generations of consoles ahead of MSFT. So I don't know what to say to anyone who doubts these guys.

 

There is something to be said for the Surface taking a write off but to be honest, it was a risky experiment to begin with. And I don't mind them taking the loss provided they pick up the pieces, build a smaller, lighter, sexier device and market it better.

 

They should be in the hardware business.

 

They SHOULD buy Nokia's hardware ability.

 

I think software has hit a wall, in many ways. The mobile paradigm is solved by developers making Apps. They are the ones making the mobile experience awesome, and connecting people and just pushing the platforms! Not the operating system makers - Apples iOS has hit maturity, it has to be changed, but they only made a few cosmetic changes. Android is all but feature paired with iOS and is mostly sold as a different skinned theme from the manufacturers. I don't think OS software is going to be different between the big players, unless you are Blackberry which has a lot of catching up to do (doubt they can make it).

 

The next few years of tablets and phones will be sold to customers on the basis of their hardware design and capabilities.

Like the camera technology and the screen size, quality or industrial design. I wouldn't be surprised if more materials become normal on phones like premium polycarbonate, wood, special glass types.

 

Hardware is where its at.

 

Its why Google bought Motorola, and why Microsoft built Surface, and wanted to partner with Nokia. I think we will see more hardware coming, and it will get way better.

 

The 2000's were a setup for software advances, the late 2000's were all about building the mobile paradigm and I believe we have found a good medium. The innovation comes from the developer community that builds apps on those platforms. The hardware is where those devices will be sold to customers.

 

I love the theories I read. You should talk to Txlaw.

[Guest valueInv]

yeah but it now is obvious they were using customers to beta test their first tablet/laptop. the reviews were awful. they knew it was awful yet they put it out there anyway because they needed to practice. you are right. they will continue to poor money into hardware. this company's investment record is terrible.

 

Hold your nose and look the other way.

 

Anyways, I thought the earnings report was good. Strong growth especially in S&T and Bing. S&T is going to be a big engine, and this coming year, I think Bing may come very close if not actually hit profitability.

 

Balance sheet is a beast, 77B in cash, 10B in investments, if you net out the debt, liquid assets of 72B!. If you assume all the cash is abroad and give it a haircut of 30%, then it gives 50B. So basically, a no growth state is giving you a 10% return.

 

They wrote down $6b last quarter. Almost a Billion this quarter. That's 10% almost 10% of their cash. At this rate that cash won't last long.

[rpadebet]

I am a newbie to the value investing world, so I am still learning the basics here. MSFT was one of the first things I invested in a few quarters ago. The decline of the Consumer PC business is well documented and widely understood, but on a purely quantitative basis I felt this offer by the market was compelling. Please help me understand where I am going wrong here and how I could permanently lose capital:

 

Current Mkt Cap: 267 bill ($32 price)

Net Cash & Cash Equivalents available on Balance Sheet: 72 bill approx (most of it is offshore, so lets assume the 30% discount)

So, Enterprise Value is 217 bill (267-72*0.7)

 

Free Cash Flow (2013 ): 24 bill (FCF Yield of 12.3%)

 

Here is my thinking on this.

Say these guys take on some debt, a very conservative banker should be willing to lend them against at least 1/3 of their FCF, i.e. The debt would lay a claim against 8bill each year. This gives the lender enough cushion should the Cash Flow decline. Assuming MSFT can borrow at even 4% (their 10Y debt currently seems to be trading around 3.1%), this means they can comfortably borrow 8bill/4%=200bill, which could easily be paid out in dividends to equity holders or used to by back stock.

 

In my opinion the current market prices imply that for 17 bill (217 EV- 200 Debt proceeds), shareholders can lay a non-contractual claim to 2/3 rds of the remaining Free Cash Flow of 16 bill. I understand that this 16 bill can decline if margins continue to compress, they keep taking writedowns on newly launched products etc, but paying just 17bill for that cash flow given the risks seems like a steal.

 

I am not saying MSFT will take on the debt and pay out the dividends, but this analysis illustrates the value in this stock to me.

 

Seniors on this board and more experienced investors please help me understand how anyone could lose capital investing in MSFT even now.

 

 

 

 

 

[Palantir]

They wrote down $6b last quarter. Almost a Billion this quarter. That's 10% almost 10% of their cash. At this rate that cash won't last long.

 

a) No they didn't.

b) Writedowns have nothing to do with cash.

[Palantir]

A big part of Windows RT was Steve Sinofsky being an ass, now that he's gone, MS can junk RT and make a unified windows system across PC's and tablets...

 

Furthermore, Surface Pro doesn't really even compete with the iPad to begin with.

[Guest wellmont]

A big part of Windows RT was Steve Sinofsky being an ass, now that he's gone, MS can junk RT and make a unified windows system across PC's and tablets...

 

Furthermore, Surface Pro doesn't really even compete with the iPad to begin with.

 

lol. a big part of RT was the CEO releasing a beta product on his unsuspecting customers and now having to write down almost $1b of inventory.

[Palantir]

That was Steven Sinofsky's creation, there is no question about that.

[Guest valueInv]

A big part of Windows RT was Steve Sinofsky being an ass, now that he's gone, MS can junk RT and make a unified windows system across PC's and tablets...

 

Furthermore, Surface Pro doesn't really even compete with the iPad to begin with.

 

Awesome. Maybe you should look at PC sales to see what the iPad is really competing with.

 

[Guest wellmont]

That was Steven Sinofsky's creation, there is no question about that.

 

again the buck stops with the CEO. You may want to give him a pass. But most shareholders are growing impatient with his leadership. CEO released the surface product. Now he is writing down about $1b because he put out an extremely faulty product. CEO bought Aquantive. CEO signed off on Vista. CEO released Kin. CEO bought Skype, which makes no money, and represents a lot of potential write down. CEO released and killed Windows Mobile. The list is growing.

[Palantir]

I see the pattern. You make a point, I refute it, you ignore it to fit your agenda.

 

You and ValueInv should hang out.