Microsoft Could See Enterprise Spending Uptick by End of 2010, Say Analysts

Microsoft reported strong earnings for the second fiscal quarter of 2010, thanks at least in part to sales of Windows 7, but software spending by the enterprise and SMBs (small and midsize businesses) remained flat. Analysts studying Microsoft's financials see a business-driven tech refresh occurring after the release of new flagship products such as Office 2010 later in the year, after which point Microsoft's business-related revenue could experience a noticeable uptick.

Microsoft reported strong earnings for the second fiscal quarter of 2010, with its revenues of $19.02 billion representing a 14 percent increase from the same quarter a year ago, but executives on the company's Jan. 28 earnings call highlighted a certain dichotomy: while consumer spending was up, contributing mightily to the 60 million Windows 7 licenses sold since the operating system's Oct. 22 release, enterprise software spending remained flat.

"We have not seen a return to enterprise growth," Bill Koefoed, Microsoft's general manager of Investor Relations, told media and analysts listening in on the call. He added that "conditions from last quarter remain unchanged" for business spending.

Microsoft previously indicated that its own revenues would be heavily dependent on a generalized tech refresh for consumers and businesses in 2010 and beyond. While there are indications that consumers may indeed be spending more on hardware and software, the comparative weakness in the business segment begs the question-when will a similar refresh begin for the enterprise and SMBs (small and midsize businesses)? 

"If I'm a business and I have a limited budget, why would I buy Office 2007 when there's a new version imminent?" Neil MacDonald, an analyst with Gartner, told eWEEK in an interview on Jan. 29. "I think what you're seeing is people who are waiting for these releases to come out."

MacDonald predicted that business spending on software would pick up more substantially in the third and fourth quarters of the calendar year, after businesses take a look at platforms such as Office 2010 released over the summer.

Other analysts seemed to concur with that assessment.

"The business cycle should coincide with a server refresh cycle and the release of Office 2010 starting later this calendar year," Katherine Egbert, an analyst with Jefferies & Co., wrote in a Jan. 29 research note.

"Expect the corporate PC refresh to provide additional growth starting in the [second half] of 2010," analyst Yun Kim of Broadpoint AmTech suggested in a Jan. 29 research note.

Sandeep Aggarwal, an analyst with Collins Stewart, suggested in a Jan. 29 report that Microsoft would benefit from a tech refresh, but declined to fix a timeline to that uptick.

"EPS impact from Azure and Office 2010 launch, sustainable market share gain by Bing, and slow but eventual recovery in Enterprise demand are not reflected in the stock price," which Aggarwal expected to rise.

Until that time, though, Microsoft could continue to be affected by the lack of business spending, Aggarwal added: "Microsoft did not see any signs of pick up in demand by Enterprise and most of the upside was consumer driven. Until we see a noticeable pick up in Enterprise demand, in addition to Server & Tools and MBD, Microsoft will be affected due to unfavorable mix shift."

Microsoft itself anticipates a tech refresh to happen in 2010.

"We expect the tech refresh to begin this calendar year," Microsoft Chief Financial Officer Peter Klein said during the Jan. 28 earnings call, adding that the company expected to see sales rise "gradually over a couple of years."

But it will be at least another quarter to see if tech spending by businesses picks up.