58 Analysis: Why investors still believe in Microsoft

Story Originally Appeared in USA TODAY

SEATTLE — With global PC sales in an accelerating slump, Microsoft on Thursday missed Wall Street's earning expectations for the software giant's fiscal fourth quarter.

Microsoft reported net income of $4.97 billion, or 59 cents per share, which contrasts a loss of $492 million in the same period a year ago, when the company wrote down $6 billion — roughly the entire value of its ill-fated 2007 purchase of digital advertising company aQuantive.

For the reporting period ending June 30, 2013, the company took a $900 million write-down for slashing the price of its Surface RT tablet.

Excluding the Surface charge, earnings were 66 cents per share, short of the 75 cents per share expected by analysts polled by FactSet. Revenue grew 10% to $19.9 billion, but that was also below the $20.7 million expected.

Shares fell more than 6% in after-hours trading to $33.03. They closed in regular trading at $35.44, down 30 cents.

Tech industry analysts say the jury is still out with respect to major moves triggered by CEO Steve Ballmer in recent months. In addition to discounting Surface, the company unveiled Xbox One and implemented a massive management restructuring.

Many of the big institutional investors who own large blocks of Microsoft shares are likely to stand pat, on the hopes that the release of Windows 8.1, the first major upgrade of Windows 8, will begin to undergird Ballmer's struggle to reposition Microsoft as a devices and services company.

"Microsoft is far from on death's door," says Gartner tech industry analyst David Cearley. "They are aggressively addressing a wide range of market challenges. Yes, they still have significant execution challenges, but, going forward, they remain a strong player in the market."

A top Microsoft European executive, Janet Gibbons, director of the company's U.K. and Ireland partner programs, told The Channel tech blog that Windows 8 hardware manufacturers are 18 months behind where Microsoft would like them to be.

Microsoft may be counting on a boost from the arrival of Intel's new Haswell chips.

"There could be a real difference as PCs and notebooks based on Intel's Haswell CPUs make their way further into the market," says Charles King, principal analyst at tech consultancy Pund-IT. "That silicon is made to support key features Windows 8 depends on, such as touch enablement and enhanced battery life, plus new voice and gesture-recognition capabilities."

Walls Street will keep a keen eye in the months ahead to gauge how well Windows 8.1 addresses concerns, and even outright resistance to the shift to a touch plus mouse-and-keyboard interface.

"If the redesign is successful, I expect we'll see a significant boost in new PC and
notebook sales," says King. "If it isn't, no amount of executive shuffling will be able
to save it."

Al Hilwa, application development software analyst at IDC, says Ballmer's reshuffling of the company's senior executives to make them more accountable for engineering decisions shows "the right priorities, but it will take time to translate organizational shift to products and services."

Hilwa is watching for tangible progress in the company's server and tools business, which continues to perform strongly. "The investments they are making in cloud data centers and the services they are rolling out today are very well targeted and extremely competitive," says Hilwa. "We have to wait and see how successful they are at blending these services in enterprise agreements for their large customers."

The biggest potential pitfall, moving forward? "Not moving fast enough to roll out new products," says Hilwa. "The biggest issue they have to tackle on the platform side is to what degree phone and tablet have to be converged for users and developers. Today this is a fragmented play."

Pund-IT's King says uninspired execution could yet trip up the company. "Microsoft's business and culture are so deeply wedded to a failing world-view that it is impossible for them to clearly perceive and execute a successful strategy," says King. "The innovations of Windows 8.1, which should have been incorporated in the original version, and the musical chairs-style reorg are both proof of that."