Microsoft Sees Business IT Spending Refresh Ahead

Microsoft executives claim in an earnings call that a business hardware refresh has begun, particularly in the areas of desktops, servers and cloud-based services. While revenues for Microsoft's enterprise and virtualization services rose in its fiscal third quarter, along with those of other business-oriented products, the overall numbers for the Microsoft Business Division remained down from the same quarter a year ago. In addition to pushing Windows 7 to businesses, Microsoft is also counting on its upcoming Office 2010 to appeal to enterprises and SMBs.

Microsoft executives are saying they see the beginning of a long-heralded business IT refresh, and suggested during an April 22 earnings call that it could persist for a number of years. While Microsoft reported increased spending on its business products during the third quarter of fiscal 2010, revenues for the Microsoft Business Division remained lower than in the same quarter a year ago.

According to those executives on the earnings call, Microsoft's enterprise services grew at a quarterly rate of 5 percent, while revenue for its virtualization solutions rose by more than 20 percent. Revenue for its Server and Tools division reached $3.57 billion for the quarter, up from $3.49 billion during the same quarter in 2009. Sales of the Windows operating system are apparently expected to exceed sales of PCs, as customers upgrade existing devices in addition to purchasing new ones.

"Business customers are beginning to refresh their desktops and the momentum of Windows 7 continues to be strong," Kevin Turner, Microsoft's chief operating officer, said in an April 22 statement. "We are also seeing tremendous interest in our market-leading cloud services for business."

During the earnings call, Microsoft Chief Financial Officer Peter Klein said Microsoft's internal data showed a "return in business hardware spending." Consumer spending remained robust, meanwhile, to the tune of an 11 percent increase for the quarter, when adjusted for the $305 million deferral of revenue from the Microsoft Office 2010 Technology Guarantee program.

But revenues for Microsoft's Business Division were also $4.2 billion for the quarter, down year-over-year from $4.5 billion for the same quarter in 2009. That represented one point of weakness in Microsoft's breakout financials, which otherwise saw gains for the Windows & Windows Live Division, Server and Tools, Online Services Division, and Entertainment and Devices Division.

The decrease in business spending during the global recession hit Microsoft hard; the company reported a 17 percent year-over-year revenue decline for the fourth fiscal quarter of 2009, followed by a 14 percent decline for the first fiscal quarter of 2010. That led Microsoft not only to kill several legacy programs and research projects in favor of concentrating its efforts on releases such as Windows 7, but also to lay off more than 5,000 employees in 2009.

Microsoft is expecting an improvement in business spending in the quarters to come; its strong sales numbers, particularly for Windows 7, have come primarily from consumers. That consumer base was largely responsible for the more than 90 million Windows 7 licenses sold since the operating system's release in October 2009. Microsoft has been pushing businesses to adopt Windows 7 through programs such as its recently extended Windows 7 Enterprise Trial program.

Microsoft is also presumably hoping that Office 2010, the next generation of its productivity platform, will attract business users. Although Microsoft holds a sizable percentage of that productivity market, it faces a rising threat from cloud-based productivity apps such as Google Apps, something that the company will try to counter with its own browser-based version of Office 2010, as well as other cloud initiatives such as Docs for Facebook.