Rocky Year Ahead for Microsoft
“Google’s not a real company. It’s a house of cards.”
—Microsoft CEO Steve Ballmer
Shares of Microsoft (NasdaqGS: MSFT) rose 7.3% on Friday, after Steve Ballmer, the tech giant’s CEO for the past 13 years, announced that he would be leaving his post within the next 12 months. However, the stock gave back some of those gains on Monday, declining 1.73%.
The company’s board of directors has struck a special committee to find Ballmer’s successor that will include chairman and founder Bill Gates. The process is expected to take some time, but the early betting is that Microsoft, which has only had two CEOs since it was founded in 1975—Gates and Ballmer—will look outside its offices for its next chief executive.
Microsoft: A Different Kind of Turnaround Story
Even though Microsoft trails rivals like Google (NasdaqGS: GOOG), Apple (NasdaqGS: AAPL) and Facebook (NasdaqGS: FB) in fast-growing markets like Internet search, mobile devices and social networking, the company’s financial performance has been strong under Ballmer, with revenue rising about 240%, from $22.96 billion in its 2000 fiscal year (fiscal years end June 30), when he took the helm, to $77.85 billion in fiscal 2013. Per-share net income has risen 204%, from $0.85 to $2.58.
Its gross profit margin also continues to be healthy, coming in at 73.9% in fiscal 2013, though that was down slightly from 76.2% in fiscal 2012 and 77.7% in fiscal 2011.
However, that respectable performance comes with a series of less rosy numbers, such as the following:
- Microsoft’s share price has fallen 40% since January 2000, when Ballmer took over from Gates. In fairness, however, the company is far from alone here, because this date was near the top of the dot-com bubble. However, the stock still trails the Nasdaq 100 index, a benchmark for tech firms, which is down 16% in that period.
- The company’s latest quarterly revenue and earnings missed the consensus forecast, and it took a $900-million writedown on its poorly selling Surface tablet computer.
- According to IT research firm Gartner, sales of PCs dropped 10.9% in the second quarter, as users continued to switch to mobile devices and away from laptops and desktops. That negatively impacts the company’s Windows division (which still supplies 25% of its sales) and, to a lesser extent, its Business division (32% of sales), which sells the Microsoft Office suite of programs to both businesses and consumers.
- The company remains an also-ran in the smartphone space: its Windows Phone operating system has gained ground recently, but it still controls just 3.3% of the global market, trailing Google’s Android, with 79%, and the iPhone at 14.2%.
- Microsoft’s Windows and Windows RT operating systems held just 4.5% of the global tablet computer market in the second quarter, well behind Android with 62.6% and the iPad at 32.5%.
- The company’s Bing search engine has 17.9% of the Internet search market, compared to Google at 66.7%.
The main reason why Microsoft trails so badly in the above-mentioned segments is that its offerings came out well after its competitors already established dominant positions. But even so, unlike, say, BlackBerry (NasdaqGS: BBRY), Microsoft is far from on the ropes: various versions of its Windows operating system still run over 90% of the world’s computers, according to Netmarketshare, and its Xbox 360 system controls 47% of the current-generation game-console market.
Ballmer will also leave behind a strong balance sheet, with cash and investments of $77.0 billion and just $12.6 billion in long-term debt, as of June 30, 2013.
Missed Opportunities, Regrettable Statements Weighed on Ballmer’s Reign
In addition to the many missed trends, Ballmer will be remembered for his colorful antics, including an unfortunate 2000 presentation to Microsoft employees in which he jumped across the stage to Gloria Estefan’s “Get on Your Feet” and then screamed “I love this company!” when he finally arrived at the podium. The video has since garnered 5.3 million views on YouTube.
He has also made a number of statements that came back to haunt him, including his take on the iPhone: “There’s no chance that the iPhone is going to get any significant market share. No chance. It’s a $500 subsidized item.”
On Android, he said: “You don’t need to be a computer scientist to use a Windows Phone. I think you do to use an Android phone.” (Tech blog AllThingsD recently ran a complete collection of memorable Ballmer quotes that you can read for yourself here.)
Other tech professionals pointed to an inability to shift away from the company’s PC-based heritage as a major reason why it hasn’t been able to capitalize on the rise of mobile devices. “Microsoft had phones, Microsoft had tablets, but they tried to put Windows in them,” Zach Nelson, CEO of Internet-based business software maker NetSuite, said in an August 26 New York Times article. “They couldn’t leave the PC world behind, even though they saw the change coming.”
“Product Person” Wanted
Investing Daily’s Jim Fink has written extensively on the relationship between corporate leadership and stock performance. One of his findings? That companies run by their founders tend to have better share price performance. In Microsoft’s case, the stock rose 178% under Bill Gates from its March 1986 IPO until Ballmer took over, though the timing of the dot-com bubble certainly played a role here, as well.
However, Gates’ return seems unlikely, and many Microsoft watchers feel the company will look for an outsider to come in and provide a fresh perspective. There also doesn’t appear to be an obvious successor within Microsoft itself.
“I don’t believe there is a successor in waiting,” said Rick Sherlund, head of U.S. technology research at Nomura Securities, in an August 23 CNBC article. “Unfortunately at Microsoft there has been enormous turnover of senior people under Ballmer, so we are left with no obvious choices here.”
In addition, the long list of product miscues on Ballmer’s watch—including the Zune music player, Surface tablet, Windows Vista and more recently Windows 8, which has been cited for hurting, rather than helping, PC sales—signals the importance of finding someone who has a track record of developing winning products.
“We’re in the era of the product person rising to the top,” said Martha Josephson, a partner at recruiting firm Egon Zehnder, in an August 26 Bloomberg article. “The best sales executive in the world cannot solve a lack of product vision.”
Another wildcard is the major restructuring that Ballmer announced in July, which aims to bring in a more collaborative approach between the company’s divisions and launch new products in a more timely fashion. It also focuses on shifting Microsoft toward being what Ballmer calls a “devices and services” company.
The uncertainty surrounding Microsoft’s leadership and future direction will likely weigh on the stock in the near term. The selection process will also likely be lengthy and will entail some hard questions about how the company sees itself. The board’s options range from an internal candidate who will support Ballmer’s restructuring to an outsider (names like Yahoo CEO Marissa Mayer and Facebook COO Sheryl Sandberg have been floated) who will bring in radical changes aimed at unlocking more shareholder value.
Either way, there are likely many months to go until the tech giant’s future direction becomes clear.