Give Ballmer the Credit He Is Due

 | Jan 24, 2014 | 11:00 AM EST  | Comments
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Mr. Ballmer:

I hate to admit it. I am starting to feel a wee bit sorry for you at the end of your long run as leader of Microsoft (MSFT). Few leaders of large technology companies have had such misfortunate timing or suffered so much in comparison to the legendary icons within the industry.

Steve Jobs got to ride in on a white horse to save Apple (AAPL), which most investors had given up for dead. Unfortunately, you got to succeed Bill Gates right at the tail end of the internet boom when tech stocks were selling at astronomical valuations.

Steve Jobs will forever be remembered for righting a sinking ship, you for maintaining an ocean liner on auto pilot. Jobs will always be attached to iconic products like the iPhone, iPod and iPad. You will be known for such breakaway successes like the Microsoft Zune.

Some of the criticism you have received over the last 13 years is justified. Microsoft missed the boat transitioning to mobile -- a fate that many other large tech companies also shared. In addition, a lack of innovation over your tenure is also a fair assessment.

You do deserve some credit, however, for several things investors have been stingy in granting you. Microsoft has more than tripled earnings and revenues under your tenure, although the stock price has never reflected that growth. This is mainly due to the high valuation the stock already had when you took the helm.

Microsoft has also maintained its leadership position in operating systems and workplace productivity applications like Microsoft Office. Most importantly, you have set up the new leader to succeed where you have failed. This can be seen throughout Microsoft's earnings report that hit the wire after the bell on Thursday -- which might be your last before your successor is named.

Not only did the company easily beat top and bottom line expectations, it made progress in several key areas. Overall revenue growth clocked in impressively at over 14% Y/Y. Xbox sales doubled over the previous quarter and even Microsoft Surface showed impressive growth.

More critically, both Windows license revenue and server software grew 12% over the prior year. Hyper-V, your server visualization product, also took an impressive 5% of market share in the segment from market leader VMware (VMW).

Most importantly, sales in your two cloud businesses (Azure & Microsoft 365) both increased better than 100%. Microsoft 365 now has 3.5 million subscribers, up from just 2 million in the prior quarter.

Whomever the new leader of the company is, they will now have a strong hand to play. The company has quietly become the number two 'cloud' software concern,  with two businesses in the space now having over $1 billion a piece in annual sales and growing exponentially. There is also over $70 billion in cash and marketable securities on the balance sheet that you have nicely left your successor.

Finally, the stock is selling for 20% less than the overall market multiple and yields over three percent. This is a much easier place to create stock market gains in coming years than the situation into which you came.

Sayonara, Mr. Ballmer. Enjoy your retirement and your dividends. May the tens of millions of shares in Microsoft you still hold and the stock of other shareholders appreciate nicely over the next few years. You certainly have put new leadership in a solid place to succeed and accomplish that feat. Maybe one day you might even get a little credit for that, too.  

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