Microsoft reported increased revenues for the second fiscal quarter of 2010, as Windows 7 continued to sell well among consumers. Despite increased cash flow, however, Microsoft executives reported no growth in the enterprise software market, and certain company segments such as Microsoft Business Division saw their revenues dip year over year. Analysts have suggested that Microsoft's success in 2010 and beyond would depend on a broader tech refresh among businesses and consumers.
Microsoft reported revenues of $19.02 billion for the second fiscal quarter
of 2010, representing a 14 percent increase from the same quarter a year ago,
when a massive recession battered the earnings of both the company and much of
the tech industry. The company attributed much of that rise to sales of Windows
7, its new operating system launched Oct. 22.
Microsoft issued a statement ahead of its Jan. 28 earnings call stating that
some 60 million Windows 7 licenses had so far been sold. Revenues for its
Windows & Windows Live Division climbed year over year from $4.06 billion
to $6.9 billion.
The company reported net income of $6.66 billion, operating income of $8.51
billion and diluted earnings per share of $0.74, representing respective
increases of 60 percent, 43 percent and 57 percent year over year. However,
some of its divisions also saw their revenue fall, with Microsoft Business
Division reporting a year-over-year decline from $4.88 billion to $4.74
billion, and its Entertainment and Devices Division tumbling from $3.25 billion
to $2.9 billion.
During a Jan. 28 earnings call, Microsoft Chief Financial Officer Peter
Klein suggested that the uptick in revenues was due largely to "strong
consumer demand for Windows 7 and PCs." However, he noted, "We have
not seen a return to enterprise software growth."
Bill Koefoed, Microsoft's general manager of Investor Relations, also
suggested on the call that "we have not seen a return to enterprise
growth." Within a business-spending context, he added, "conditions
from last quarter remain unchanged" with "weak business PC
sales" despite strength in the consumer segment.
Microsoft had found itself battered by the global recession, reporting a 17
percent year-over-year revenue decline for the fourth fiscal quarter of 2009
and a 14 percent decline for the first fiscal quarter of 2010. However,
Microsoft executives and Wall Street analysts seemed somewhat satisfied at the
time with the latter number, as it was stronger than earlier estimates.
In a statement before the Oct. 23 earnings call announcing the numbers for
the first fiscal quarter of 2010, former Microsoft Chief Financial Officer
Chris Liddell suggested that the company had "maintained our cost
discipline, which allowed us to drive strong earnings performance despite
continued tough overall economic conditions."
Part of that cost discipline involved
cutting 5,000 employees through the course of 2009.
That quarter, Microsoft also reported that it would defer $1.47 billion in
revenue due to the Windows 7 Upgrade Option program and sales of Windows 7 to
OEMs and retailers before the operating system's Oct. 22 launch date. Had those
figures been incorporated into Microsoft's overall tally, they would have
raised Microsoft's overall quarterly revenues to $14.39 billion, for a
year-over-year decline of a comparatively softer 4 percent.
Instead, that income found its way onto the balance sheet for the most recent
quarter, ended Dec. 31,
2009, where deferred revenue grew from $1.47 billion to $1.71
billion.
Liddell had cautioned during the Oct. 23 earnings call that "Windows
division revenue will be in line with overall PC growth." He also
suggested that hesitation among CIOs could lead to a more gradual tech refresh
for both the enterprise and SMBs (small to medium-sized businesses) into the years
beyond 2010. With that in mind, Microsoft was staying "reasonably
cautious" about the rate of adoption for Windows 7, despite some
apparently good early reviews of the operating system.
Around the time of that earnings announcement, a
number of analysts suggested that a business-oriented tech refresh could start
in earnest sometime in 2010.
"It looks like the Win7 inspired upgrade cycle can start in late 2010
and run through early 2013," Katherine Egbert, an analyst with Jefferies
& Co., wrote in an Oct. 12 report. "We expect new hardware purchases
to precede the software upgrades by about 6 months."
According
to research firm Net Applications, some 92.21 percent of PCs currently run
Windows, followed by 5.11 percent using the Mac OS, 1.02 percent using Linux
and 0.53 percent relying on Java ME. Of those PCs running Windows, some 67.77
percent continue to run the nearly decade-old Windows XP, while 17.87 percent
run Windows Vista and 5.71 percent use Windows 7.
Microsoft still expects a broad-based enterprise and SMB refresh to take
place, despite the current flatness in business software growth.
"We expect the tech refresh to begin this calendar year," Klein
said during the earnings call, with sales increasing "gradually over a
couple of years."
Nicholas Kolakowski is a staff editor at eWEEK, covering Microsoft and other companies in the enterprise space, as well as evolving technology such as tablet PCs. His work has appeared in The Washington Post, Playboy, WebMD, AARP the Magazine, AutoWeek, Washington City Paper, Trader Monthly, and Private Air. He lives in Brooklyn, New York.
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