Microsoft Business Solutions (MBS) continues to lag its parent's profitability expectations as well as competitors' performance, as a prolonged product upgrade cycle and transition to partner-provided services extended the unit's losses 9% to $76 million in the recently completed fourth quarter, on revenues of $247 million -- an 11% growth spurt from the like period last year.
Moreover, during a conference call with financial analysts late last week, newly appointed CFO Chris Liddell said MBS would not be profitable until an unspecified time in fiscal 2007. Earlier this year, Microsoft company officials said MBS would turn profitable in fiscal 2006 on revenues of $850 million.
During its recent Worldwide Partner Conference, MBS senior vice president Doug Burgum told Managing Automation that Microsoft isn't worried by MBS' persistent red ink because it is investing in the enterprise applications business for the long term. However, Liddell indicated to financial analysts that, while the company was pleased with MBS' revenue growth, it was hoping that profitability had come sooner.
"Overall, we're happy with revenue growth," Liddell said. "Clearly we would like to see [MBS] in profitability as well. We are not likely to see it in the coming year but we are still driving towards anticipation of profitability in the following year."
MBS' $76 million Q4 loss -- up from $54 million in the previous period -- was primarily attributed to escalating sales and marketing costs and a decline in services revenue. Services revenue, in fact, fell 16% in the fourth quarter and 25% year over year as the company "encouraged" resellers to assume more of these activities. MBS' 12% up tick in licensed revenue, while promising, was not enough to make up for the services revenue shortfall, the company said.
While Microsoft does not break down MBS sales by product category, vertical market or region, it pointed to two manufacturing industry wins in the fourth quarter that are reflective of licensing growth. SigmaTel, a manufacturer of MP3 and other audio chips, as well as Wilson Trailer, a 100-year-old manufacturer of livestock, grain transport equipment, both signed contracts for Axapta ERP applications in the fourth quarter, Microsoft said.
Still, according to Bob Parker, a vice president with Manufacturing Insights, a research subsidiary of International Data Corp., Microsoft has missed opportunities in addressing the growing needs mid-market manufacturers have for integrated enterprise applications. While acquired companies like Great Plains and Axapta have brought serviceable technology, the real value of Microsoft's business applications initiative is driven by reseller loyalty, which continued product delays have challenged.
"They've turned this into a science experiment to validate the .Net architecture, trying to reconstruct code into a framework," Parker said, alluding to Project Green, which promises to tie together Microsoft's numerous enterprise applications into an interoperable software suite. Microsoft, he said, might have been better off emulating SAP by positioning .NET as a NetWeaver equivalent -- and letting channel partners "build extensions to software products that they could offer to their installed bases."
Microsoft put a lot at risk by tying up resources to build out an interoperable applications architecture when resellers needed new ERP functionality to drive upgrade and new project engagements, Parker said. "At end of day, in 2007 they may have a great ERP suite that scales up and down, but they may have to restructure the channel up and down as well," Parker noted, adding that while Microsoft has the requisite resources to work through revenue shortfalls, resellers don't.
"The channel expects upgrades every 18 month," he continued. "This allows resellers to tell clients 'you know that warehouse management system we built for you in Great Plains, well let us rewrite it for you in .Net.' That provides resellers with a stream of add-on work ... these guys have to eat in the mean time."
If MBS is to achieve profitability in 2007, it will need to work hard to keep its partners happy -- beyond offering additional support and steering services engagements their way -- by making good on long-awaited product deliverables such as Axapta 4.0 and CRM 3.0 -- both of which are expected to make top-line contributions by the second half of fiscal 2006, company officials said.
The release of both packages is expected to contribute significantly to MBS' projected double-digit revenue growth in fiscal 2006, which Liddell said would be on the order of 10% to 11% for the full year. If attained, that would mean MBS would maintain Q4's 11% revenue growth rate, which would exceed the 6% to 7% increase projected by independent researchers for the business applications category during calendar 2006, Liddell noted.
Not bad growth, but the figure pales in comparison to results recently posted -- and growth expectations voiced -- by arch-rivals SAP and Oracle (click here for SAP and here for Oracle). In fact, in a conference call with analysts to discuss its fiscal Q2 results, SAP called the mid-market, which Microsoft exclusively targets and Oracle touches at the high-end, "a strategic battleground."
That battleground may be just emerging, as the three vendors seek pay back from accelerated mid-market adoption of enterprise applications. "They are all marching to Waterloo," Manufacturing Insights' Parker said, adding that SAP and Oracle still tend to target larger companies within the mid market, while Microsoft remains focused on businesses with $100 million or less in revenue.
The skirmishing will start when Microsoft tries to go up market and SAP and Oracle try to go down market, where they will compete more aggressively with QAD, SSA Global and others for business among companies with between $250 million to $750 million in revenue, many of whom will be active buyers of ERP in next few years, according to Manufacturing Insights' research. "That's when we will see the real battle," Parker pointed out.
In the mean time, Microsoft is keeping its powder dry as it highlights impending upgrades to its line of business products -- such as the ability to access CRM 3.0 through Microsoft Outlook -- prior to releasing the software to the market. The company's potent brand and hold on desktop and server software -- from development tools and operating systems through database software -- will help it get a seat at the negotiating table with many manufacturing companies.
And success across Microsoft's diverse array of business and consumer product lines, which should only improve with the release of Vista (the long-delayed operating system previously known as Longhorn), SQL Server and Office suite, is throwing off enough cash to easily cover any losses wracked up by MBS.
Microsoft, for example, reported a profit of $12.3 billion, up from $8.2 billion posted in the previous year. Fiscal 2005 revenues totaled a record $39.8 billion, up from $36.8 billion the year before. For fiscal 2006, Microsoft expects earnings of between $18.3 billion to $18.8 billion, on revenue of $43.7 billion to $44.5 billion.
"We closed out a record fiscal year with strong revenue growth in the fourth quarter driven by healthy, broad-based demand across all customer segments and channels," Liddell said, in a prepared statement. "... These results provide solid momentum heading into fiscal 2006, which is shaping up to be a strong year for growth and investment. We expect double digit revenue growth next year, kicking off the strongest multi-year product pipeline in the company's history."