MSFT CY2021 Q3 Earnings are in

[Horatio]

https://www.microsoft.com/en-us/investo ... se-webcast

https://finance.yahoo.com/news/microsof ... 19993.html

That's a pretty impressive quarter. Revenues were up 22%, operating income was up 27% and net income was up 48%(!). That's pretty nuts. Highlights were LinkedIn, I think for the first time, being up 42%, Azure being up 50% and Bing (!) being up 40%. Lowlight was definitely Surface, down 17% as its lineup was aging and the new models didn't ship in the quarter.

This upcoming quarter should be interesting, with the new Surface models out and the release of Windows 11, plus the holiday should result in more Game Pass sales (Xboxes are still supply limited, so I doubt there will be increases there).

 

[Jade]

I continue to believe Microsoft is a better bet than Apple in ten years—barring a product of iPhone level disruption. Microsoft's $20 billion in net income on $45 billion in revenue just reinforces that. Apple will probably earn nearly twice as much revenue for their quarter, but net income will not be double.

However, as a personal technology enthusiast I'm more interested in the devices. While Microsoft continues to add products to their portfolio—a rumored $400 Surface Laptop for education may be added this quarter—growth has stalled. Microsoft blames chip shortages for the 17 percent decline to $1.3 for the quarter, with another projected decline for the current quarter of approximately 10 percent.

Looking at the bigger picture, it's really pretty small in terms of device sales. Surface earned approximately $6.5 billion for the last fiscal year. Scrape of $500 million for all Panay's vanity projects, Surface Studio, Surface Book, Surface Duo, and assorted accessories, and it leaves $6 billion for three devices: Surface Pro, Surface Laptop, and Surface Go. Divide up that revenue equally with ASPs of $1,000 for the first two and $500 for the last, and it's a few million devices each per year.

I continue to think this is unsustainable, or rather it is sustainable indefinitely for Microsoft, just not something leadership is keen on. I think that either Surface division gets reorganized into some kind of "idea division" churning out reference designs for hardware partners, or Microsoft gets serious and boring about hardware. They sell laptops for education, consumers, and business/professionals ranging from $400 to $2,000: Surface Laptop SE, Surface Laptop, and Surface Laptop Pro. Maybe they add a reasonably priced AIO to that too, but all the crap from Yesterday's Tomorrow gets junked. They also ditch the Surface Go and sell only the Surface Pro—no Surface Pro X, at least not until there is an ARM chip that competes with Apple, so probably years away. Of course, this won't happen as long as Panos Panay is allowed to play the role of Jony Ives at Microsoft, and how long that continues is the real question.

Still, the larger company is pretty much unstoppable as a software, services, and cloud computing behemoth, and that's all that really matters.

 

[YoHo]

Chip shortages are a major major issue though, so it's hard to just handwave it away. Based on experience where I work.

 

[Zich]

If the 15% minimum tax passes, it should be interesting to see how that impacts profit and stock price.

 

[Dano40]

If the 15% minimum tax passes, it should be interesting to see how that impacts profit and stock price.

The common public is paying, the boat will sink for the 99%, but the upper tier companies and the 1%’s will rise….

 

[ant1pathy]

If the 15% minimum tax passes, it should be interesting to see how that impacts profit and stock price.

The common public is paying, the boat will sink for the 99%, but the upper tier companies and the 1%’s will rise….

Same as it ever was

same as it ever was

same as it ever was

same as it ever was

same as it ever was

same as it ever was

same as it ever was

same as it ever was...

 

[Echohead2]

I continue to believe Microsoft is a better bet than Apple in ten years—barring a product of iPhone level disruption. Microsoft's $20 billion in net income on $45 billion in revenue just reinforces that. Apple will probably earn nearly twice as much revenue for their quarter, but net income will not be double.

However, as a personal technology enthusiast I'm more interested in the devices. While Microsoft continues to add products to their portfolio—a rumored $400 Surface Laptop for education may be added this quarter—growth has stalled. Microsoft blames chip shortages for the 17 percent decline to $1.3 for the quarter, with another projected decline for the current quarter of approximately 10 percent.

Looking at the bigger picture, it's really pretty small in terms of device sales. Surface earned approximately $6.5 billion for the last fiscal year. Scrape of $500 million for all Panay's vanity projects, Surface Studio, Surface Book, Surface Duo, and assorted accessories, and it leaves $6 billion for three devices: Surface Pro, Surface Laptop, and Surface Go. Divide up that revenue equally with ASPs of $1,000 for the first two and $500 for the last, and it's a few million devices each per year.

I continue to think this is unsustainable, or rather it is sustainable indefinitely for Microsoft, just not something leadership is keen on. I think that either Surface division gets reorganized into some kind of "idea division" churning out reference designs for hardware partners, or Microsoft gets serious and boring about hardware. They sell laptops for education, consumers, and business/professionals ranging from $400 to $2,000: Surface Laptop SE, Surface Laptop, and Surface Laptop Pro. Maybe they add a reasonably priced AIO to that too, but all the crap from Yesterday's Tomorrow gets junked. They also ditch the Surface Go and sell only the Surface Pro—no Surface Pro X, at least not until there is an ARM chip that competes with Apple, so probably years away. Of course, this won't happen as long as Panos Panay is allowed to play the role of Jony Ives at Microsoft, and how long that continues is the real question.

Still, the larger company is pretty much unstoppable as a software, services, and cloud computing behemoth, and that's all that really matters.

I love it. $6.5B puts surface by itself in the Fortune 500. A couple of percent when it was Apple was plenty of marketshare and unit sales, but with Surface it is doom. It has increased unit sales and revenues. It is a success and you color it a failure. They have new devices coming, a MUCH improved Duo, etc. I have no idea why you are so invested in Surface failing.

 

[Echohead2]

plus the holiday should result in more Game Pass sales (Xboxes are still supply limited, so I doubt there will be increases there).

Well...gaming was up 16% y/y. Hardware was up 166%. I suspect you'll see pretty good hardware sales y/y (yes, limited supply, but balanced by full quarter vs half quarter last year), plus game pass.

 

[Jade]

I love it. $6.5B puts surface by itself in the Fortune 500. A couple of percent when it was Apple was plenty of marketshare and unit sales, but with Surface it is doom. It has increased unit sales and revenues. It is a success and you color it a failure. They have new devices coming, a MUCH improved Duo, etc. I have no idea why you are so invested in Surface failing.

The difference between when the Mac had a couple of percent market share and Surface having no percent market share is that the Mac was Apple. Also, revenue is not profit. Microsoft has never stated the profitability of Surface hardware, if there is any, same for Xbox console sales. Of course, we know know from legal disclosures in court that Microsoft has never made any money selling Xbox hardware. That's acceptable because they make it up on game sales, but Surface has no way to make that kind of money.

For that matter, the fewer the sales, the higher the cost to make something, so the less profit without exorbitant price. Hence, Surface Duo 2 actually increased in price, despite the fire sales for the original. Same rule applies for the other Panay vanity projects: Surface Studio, the now cancelled SurfaceBook, and the new Surface Studio Laptop. Those don't even count for the division, except as a drain on engineering resources better spent elsewhere.

Microsoft has three real Surface products: Surface Go, Surface Laptop, and Surface Pro. That they don't have a Surface Laptop Pro for business or a Surface Desktop AIO for consumers continues to mystify. It shows a lack of seriousness about being a PC maker. Microsoft needs to make the products people actually want to buy, not the products Panos Panay wants people to buy. Otherwise, for Surface, long timeframe or short, doom.

 

[gypsumfantastic]

Honestly I still don't get Surface. They're supposedly a halo device, but I've never really been sure what they were meant to be a halo for.

Surely not Windows? Windows is not now, and hasn't really been for years, a strategic asset for Microsoft, so Surface devices seem kinda redundant in Satya Nadella's big platform vision.

Maybe Surface devices should be rebranded as XBox PCs and be free with a two year GamePass Ultimate susbscription or something I dunno.

 

[Jade]

Surface was originally supposed to be a reference design to show those PC makers how it was done, though I think it was really part of Steve Ballmer's Apple envy. The problem now is PC OEMs make better devices than Microsoft, often for less money. My guess is if Surface goes down Microsoft will keep it around as a reference design group, kind of like how they kept a couple of "experience" stores after fleeing retail.

Edit: Gaming PC!

I didn't even think of that. Again, it shows how unserious Microsoft is about Surface that they don't have a gaming PC for their many gaming hooks. Yeah, it's Panay's thing, like Apple design was under Ives after Jobs died. We all know how that turned out, five years of drift before righting the Mac design ship, for one.

 

[Echohead2]

I love it. $6.5B puts surface by itself in the Fortune 500. A couple of percent when it was Apple was plenty of marketshare and unit sales, but with Surface it is doom. It has increased unit sales and revenues. It is a success and you color it a failure. They have new devices coming, a MUCH improved Duo, etc. I have no idea why you are so invested in Surface failing.

The difference between when the Mac had a couple of percent market share and Surface having no percent market share is that the Mac was Apple. Also, revenue is not profit. Microsoft has never stated the profitability of Surface hardware, if there is any, same for Xbox console sales. Of course, we know know from legal disclosures in court that Microsoft has never made any money selling Xbox hardware. That's acceptable because they make it up on game sales, but Surface has no way to make that kind of money.

For that matter, the fewer the sales, the higher the cost to make something, so the less profit without exorbitant price. Hence, Surface Duo 2 actually increased in price, despite the fire sales for the original. Same rule applies for the other Panay vanity projects: Surface Studio, the now cancelled SurfaceBook, and the new Surface Studio Laptop. Those don't even count for the division, except as a drain on engineering resources better spent elsewhere.

Microsoft has three real Surface products: Surface Go, Surface Laptop, and Surface Pro. That they don't have a Surface Laptop Pro for business or a Surface Desktop AIO for consumers continues to mystify. It shows a lack of seriousness about being a PC maker. Microsoft needs to make the products people actually want to buy, not the products Panos Panay wants people to buy. Otherwise, for Surface, long timeframe or short, doom.

Of course MS has made money at times on xbox hardware. Remember that time that they kept the same price for like 3 years with xbox360?

The idea of "the fewer the sales, the higher the cost to make something" really only exists to a point. Once you reach a threshold, the savings dimenish (a LOT). Ordering a million of something will get you huge savings over ordering 10,000 or 100,000...but ordering 10mil will be significantly less.

 

[Echohead2]

Surface was originally supposed to be a reference design to show those PC makers how it was done, though I think it was really part of Steve Ballmer's Apple envy. The problem now is PC OEMs make better devices than Microsoft, often for less money. My guess is if Surface goes down Microsoft will keep it around as a reference design group, kind of like how they kept a couple of "experience" stores after fleeing retail.

Edit: Gaming PC!

I didn't even think of that. Again, it shows how unserious Microsoft is about Surface that they don't have a gaming PC for their many gaming hooks. Yeah, it's Panay's thing, like Apple design was under Ives after Jobs died. We all know how that turned out, five years of drift before righting the Mac design ship, for one.

Yes, it shows their influence that other computer makers (including Apple) copied the Surface.

 

[Jade]

I love it. $6.5B puts surface by itself in the Fortune 500. A couple of percent when it was Apple was plenty of marketshare and unit sales, but with Surface it is doom. It has increased unit sales and revenues. It is a success and you color it a failure. They have new devices coming, a MUCH improved Duo, etc. I have no idea why you are so invested in Surface failing.

The difference between when the Mac had a couple of percent market share and Surface having no percent market share is that the Mac was Apple. Also, revenue is not profit. Microsoft has never stated the profitability of Surface hardware, if there is any, same for Xbox console sales. Of course, we know know from legal disclosures in court that Microsoft has never made any money selling Xbox hardware. That's acceptable because they make it up on game sales, but Surface has no way to make that kind of money.

For that matter, the fewer the sales, the higher the cost to make something, so the less profit without exorbitant price. Hence, Surface Duo 2 actually increased in price, despite the fire sales for the original. Same rule applies for the other Panay vanity projects: Surface Studio, the now cancelled SurfaceBook, and the new Surface Studio Laptop. Those don't even count for the division, except as a drain on engineering resources better spent elsewhere.

Microsoft has three real Surface products: Surface Go, Surface Laptop, and Surface Pro. That they don't have a Surface Laptop Pro for business or a Surface Desktop AIO for consumers continues to mystify. It shows a lack of seriousness about being a PC maker. Microsoft needs to make the products people actually want to buy, not the products Panos Panay wants people to buy. Otherwise, for Surface, long timeframe or short, doom.

Of course MS has made money at times on xbox hardware. Remember that time that they kept the same price for like 3 years with xbox360?

The idea of "the fewer the sales, the higher the cost to make something" really only exists to a point. Once you reach a threshold, the savings dimenish (a LOT). Ordering a million of something will get you huge savings over ordering 10,000 or 100,000...but ordering 10mil will be significantly less.

Xbox VP Lori Wright explicitly stated Microsoft never profited on the sale of consoles during the Epic Games v Apple trial. I'm surprised you didn't know that. I guess you'll be retracting that assertion and never making it again, huh?

 

[Echohead2]

I love it. $6.5B puts surface by itself in the Fortune 500. A couple of percent when it was Apple was plenty of marketshare and unit sales, but with Surface it is doom. It has increased unit sales and revenues. It is a success and you color it a failure. They have new devices coming, a MUCH improved Duo, etc. I have no idea why you are so invested in Surface failing.

The difference between when the Mac had a couple of percent market share and Surface having no percent market share is that the Mac was Apple. Also, revenue is not profit. Microsoft has never stated the profitability of Surface hardware, if there is any, same for Xbox console sales. Of course, we know know from legal disclosures in court that Microsoft has never made any money selling Xbox hardware. That's acceptable because they make it up on game sales, but Surface has no way to make that kind of money.

For that matter, the fewer the sales, the higher the cost to make something, so the less profit without exorbitant price. Hence, Surface Duo 2 actually increased in price, despite the fire sales for the original. Same rule applies for the other Panay vanity projects: Surface Studio, the now cancelled SurfaceBook, and the new Surface Studio Laptop. Those don't even count for the division, except as a drain on engineering resources better spent elsewhere.

Microsoft has three real Surface products: Surface Go, Surface Laptop, and Surface Pro. That they don't have a Surface Laptop Pro for business or a Surface Desktop AIO for consumers continues to mystify. It shows a lack of seriousness about being a PC maker. Microsoft needs to make the products people actually want to buy, not the products Panos Panay wants people to buy. Otherwise, for Surface, long timeframe or short, doom.

Of course MS has made money at times on xbox hardware. Remember that time that they kept the same price for like 3 years with xbox360?

The idea of "the fewer the sales, the higher the cost to make something" really only exists to a point. Once you reach a threshold, the savings dimenish (a LOT). Ordering a million of something will get you huge savings over ordering 10,000 or 100,000...but ordering 10mil will be significantly less.

Xbox VP Lori Wright explicitly stated Microsoft never profited on the sale of consoles during the Epic Games v Apple trial. I'm surprised you didn't know that. I guess you'll be retracting that assertion and never making it again, huh?

No. I'd have to read the quote and see how it was worded. They likely didn't make money on xbox360 hardware as a whole over the life, but that they never made any profit on a any model...nah..

 

[Jade]

Xbox Has Never Turned a Profit On Any Of Its Devices

Xbox vice president Lori Wright has been called to testify in the Epic vs. Apple court case as a third-party witness and give insight into the gaming market as a console partner. Her testimony has shed light on some of Xbox's internal workings including how Xbox has never made a profit off of hardware through any of the Xbox iterations.During an examination, Epic's lawyer Wes Earnhardt began a line of questioning on the profitability of console hardware. Earnhardt asks Wright, "How much margin does Microsoft earn on the sale on the Xbox consoles?" To which Wright responds, "We don't. We sell the consoles at a loss."

"Just to be clear, does Microsoft ever earn a profit on the sale of an Xbox console?" Wright follows-up.

"No," Wright says.

This was widely reported at the time in tech media, surprised you missed, but there it is. You believed something for a long time. It wasn't true. Just let it go. Don't make this like the Windows Phone thing.

 

[Horatio]

I remember that from the trial, and I remember it feeling kinda weasely - like "what do they mean by profit" levels of weasely. Like did they mean COGS, or did they tack on a bunch of related, but debatable things (marketing, software development, etc.)?

 

[Jade]

Perhaps she did mean something else, but that quote is unambiguous. It's fair to say Microsoft does not sell console hardware at a profit, not individually or aggregate. Since Sony has never willingly stated, or been forced to reveal, the profitability of PlayStation, it's not fair to make the same claim. Only Nintendo makes a profit on console sales, at least some of the time.

 

[Echohead2]

I remember that from the trial, and I remember it feeling kinda weasely - like "what do they mean by profit" levels of weasely. Like did they mean COGS, or did they tack on a bunch of related, but debatable things (marketing, software development, etc.)?

Exactly...and not only that, by generation it could also be true. With xbox360, they sold at loss for a while, then had that $1B write off for the warranty for bad hardware. So for the generation they could have lost money, but they didn't lower the price for 3-4+ years.

 

[gypsumfantastic]

One of the things that has changed is that Microsoft no longer cares unduly if it makes a profit on hardware. Previously there had always been an intent for hardware to be profitable, whether they succeeded or not. Current Microsoft does not care, because it sells platforms not hardware, and the XBox is now a gateway drug to the GamePass platform.

 

[Echohead2]

I remember that from the trial, and I remember it feeling kinda weasely - like "what do they mean by profit" levels of weasely. Like did they mean COGS, or did they tack on a bunch of related, but debatable things (marketing, software development, etc.)?

hardware R&D, etc. too. Warehousing, shipping, etc. (at least those are semi-legit). But based on COGS...no way. I've played those games.

 

[YoHo]

WAIT WAIT WAIT. COGS USUALLY includes at least some apportionment for R&D of any kind. It may not include marketing and it certainly wouldn't include game development, but I would expect it to include any software that ships with the box.

I know for us, a TAC purchase still means my salary gets paid as I'm part of R&D. It just removes the profit margin and any other associated costs.

 

[Entegy]

Edit: Gaming PC!

I didn't even think of that. Again, it shows how unserious Microsoft is about Surface that they don't have a gaming PC for their many gaming hooks. Yeah, it's Panay's thing, like Apple design was under Ives after Jobs died. We all know how that turned out, five years of drift before righting the Mac design ship, for one.

Microsoft has a gaming PC. It's called the Xbox One and Xbox Series S/X. Runs Windows OneCore with an appropriate UI, uses DirectX, etc. It's just not an open PC.

I would seriously question a Surface gaming laptop beyond the current Book/Laptop Studio when Xbox already exists.

 

[Echohead2]

WAIT WAIT WAIT. COGS USUALLY includes at least some apportionment for R&D of any kind. It may not include marketing and it certainly wouldn't include game development, but I would expect it to include any software that ships with the box.

I know for us, a TAC purchase still means my salary gets paid as I'm part of R&D. It just removes the profit margin and any other associated costs.

I don't think it "usually" includes R&D. Quite often R&D is considered part of "overhead". At least for physical goods...software development could easily be different.

 

[Jade]

Edit: Gaming PC!

I didn't even think of that. Again, it shows how unserious Microsoft is about Surface that they don't have a gaming PC for their many gaming hooks. Yeah, it's Panay's thing, like Apple design was under Ives after Jobs died. We all know how that turned out, five years of drift before righting the Mac design ship, for one.

Microsoft has a gaming PC. It's called the Xbox One and Xbox Series S/X. Runs Windows OneCore with an appropriate UI, uses DirectX, etc. It's just not an open PC.

I would seriously question a Surface gaming laptop beyond the current Book/Laptop Studio when Xbox already exists.

Doesn't Xbox Game Pass specifically call out the value of gaming across consoles and PCs? Long term, I suppose cloud will capture enough gamers that Xbox hardware will disappear, but that's then. Now, Microsoft doesn't have a desktop PC for consumers, nothing for gamers, and a questionable "pro" laptop.

The Surface Studio Laptop is probably going to fail for the same reason as the Surface Book. There are not enough artists and too many pros that just want a workstation with as much power and battery life as possible. Something like the new MacBook Pro, but running Windows.

Panay keeps chasing vanity projects, and Microsoft could do that forever, just like they could have kept a hundred retail stores open forever, but they didn't. Supply chain collapse is a pretty good reason for a reorg. We'll see what happens.

 

[YoHo]

WAIT WAIT WAIT. COGS USUALLY includes at least some apportionment for R&D of any kind. It may not include marketing and it certainly wouldn't include game development, but I would expect it to include any software that ships with the box.

I know for us, a TAC purchase still means my salary gets paid as I'm part of R&D. It just removes the profit margin and any other associated costs.

I don't think it "usually" includes R&D. Quite often R&D is considered part of "overhead". At least for physical goods...software development could easily be different.

It depends, Everywhere I've worked, a portion of Hardware R&D is attached, because it's been budgeted.

 

[Echohead2]

WAIT WAIT WAIT. COGS USUALLY includes at least some apportionment for R&D of any kind. It may not include marketing and it certainly wouldn't include game development, but I would expect it to include any software that ships with the box.

I know for us, a TAC purchase still means my salary gets paid as I'm part of R&D. It just removes the profit margin and any other associated costs.

I don't think it "usually" includes R&D. Quite often R&D is considered part of "overhead". At least for physical goods...software development could easily be different.

It depends, Everywhere I've worked, a portion of Hardware R&D is attached, because it's been budgeted.

Interesting. Everywhere I've worked it has never been included.