Microsoft felt the effects of the global recession, including declines in the PC and server markets, as its earnings declined 17 percent from the same quarter in 2008. Although Microsoft came in below Wall Street Estimates with $13.10 billion in quarterly revenue, it can look forward to a possible earnings bump later in 2009 with the release of Windows 7 and Windows Server 2008.Microsoft
took a hit to it earnings during its fourth financial quarter of 2009,
reporting a 17 percent decline in year-over-year revenue. Overall, Microsoft
earned $13.10 billion for the quarter, coming in more than $1 billion below
Wall Street estimates.
Although Microsoft hit several technical milestones during the quarter,
including the rollout of the Windows 7 and Windows Server 2008 release
candidates, it will not see revenue on those products until later in the year.
The deferring of revenue related to the Windows 7 Upgrade Option program, announced
on June 25, dragged down earnings per share by 2 cents.
"Our business continued to be negatively impacted by weakness in the
global PC and server markets," Chris Liddell, Microsofts chief financial
officer, said in a statement before the July 23 earnings call. "In light
of that environment, it was an excellent achievement to deliver over $750
million of operational savings compared to the prior year quarter."
During the earnings call, Liddell re-emphasized that the quarter had been
"difficult but encouraging."
"I do feel better about our relative performance," Liddell added.
"We actually executed much better across all aspects of our
business." He also noted that the company had seen signs of overall
economic improvement: "We have begun to see sequential stabilization in
some our key businesses. Im very pleased with the way in which we are
responding to the environment."
Heading into the call, earnings for the current quarter were estimated at 36
cents a share on revenues of $14.37 billion, representing a year-over-year drop
of 9.3 percent. For the same quarter in 2008, Microsoft earned 47 cents a share
on $15.84 billion in revenue. Earlier in the year, Microsoft
posted its first-ever quarterly revenue decline, with a handful of its
business units showing significant drops in revenue.
Overall for the fiscal year ended June 30, Microsoft reported revenue of
$58.44 billion, down 3 percent from the prior year.
Even as its revenues decline, Microsoft is in the midst of readjusting its
corporate strategy in the face of a rapidly changing IT paradigm. Whereas in
previous years the company could rely on its desktop dominance to ensure
revenues and profitability, the increased prevalence of cloud-based platforms
and applications such as Google Apps obviously has the Redmond,
Wash., company somewhat concerned that its
model could become outdated.
To combat that, Microsoft has readjusted its strategy to embrace the cloud, particularly
with regard to Office 2010, which it will offer as a free online service to
subscribers of Microsoft Live. However, the online versions of Word, Excel,
OneNote and PowerPoint will be somewhat more stripped down from the full
versions. Microsoft will also offer a hosted subscription service and
on-premises versions of Office 2010 for those SMBs (small- to medium-sized
businesses) and enterprise not willing to move into the cloud in one shot.
Microsoft will also potentially be facing a new Web-based operating system,
Google Chrome OS, scheduled for release in the second half of 2010. Although
designed to run on less-powerful mininotebooks, known popularly as
"netbooks," the prospect of an operating system released by one of
Microsofts prime Web competitors had a number of media outlets prematurely
predicting Redmonds imminent
demise.
However, Microsoft seems to have put on a public face of dismissing Chrome
OS, with Microsoft
CEO Steve Ballmer claiming during his July 14 keynote address at Microsofts
Worldwide Partner Conference that Googles operating system was "highly
interesting" but would be unable to meet users needs for both full
online and offline capability.
Microsofts response to Googles shot across its bows may be to
commercialize its own research into a browser-based OS, a
project code-named Gazelle.
But in the short term, Microsoft will be depending on Windows 7which has
proven to be a pre-sales bestseller on online shopping sites such as Amazonto
be a monster hit. Roughly a third of Microsofts historical income has come
from its operating-system sales. In order to encourage a rapid worldwide
rollout, Microsoft has instituted sweeping price cuts and discounts for the
operating system. In the case of consumers buying retail copies of Windows 7,
the strategy thus far has seemed a success.
The looming question, though, is whether SMBs (small and midsized
businesses) and the enterprise will be willing to leave the bunkers in which
theyve spent most of the current recession and begin spending to upgrade their
systems. A
recent survey of 1,000 companies by ScriptLogic suggested that six out of
10 companies will avoid purchasing Windows 7 at the time of its debut, although
34 percent also said they will have the operating system online by December
2010.
Despite weakness in sales of business PCs, and overall lower IT budgets for
businesses, Microsoft CEO Steve Ballmer is
betting that SMBs and the enterprise are in desperate need of a tech refresh.
Speaking during a Q&A session following his Worldwide Partner Conference
speech, Ballmer said, "Even if you take the assumption that [the economy]
wont turn around for a long period of time, every minute of every day were
building up a pent-up demand for IT."
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