Microsoft took hits from a number of directions on its way to a massive decline in revenue for the fourth quarter of 2009, including a recessionary environment, still-slumping PC sales and a rise in the sale of mininotebooks, also known as "netbooks," that only run Microsoft's lower-margin products. However, Microsoft CFO Chris Liddell suggested that improvement in key areas could come in 2010.
devastating financial results for last quarter were due to a number of factors,
including a flagging economy, lowered sales in traditional PCs and a rise in
mininotebooks, known popularly as "netbooks," which can only be
loaded with lower-margin Microsoft products.
During a July 23 earnings call, Microsoft reported a 17 percent decline in
year-over-year revenue for the fourth quarter of 2009, undershooting Wall
Street estimates by more than $1 billion. Overall, the company earned $13.10
billion for the quarter, below predictions of $14.37 and a substantial drop
from the same quarter in 2008, when it earned $15.84 billion.
"Average PC sales are sort of down in the traditional market 16 to 18
percent, and business was disproportionately badly affected," Chris
Liddell, Microsoft's chief financial officer, said during the earnings call. By
2010, he hoped, "we'll see a double impact of a better PC market
year-over-year and a better mix in the types of PCs we'll be selling relative
to the average selling price."
Microsoft's savior in this situation would be SMBs and the enterprise
engaging in a massive, collective tech refresh.
"Hopefully business PC growth will be at or greater than
consumer," Liddell added, "and so you'll start to see higher average
selling price, units will have a higher growth rate and, hence, ASPs [average
selling price] will go up."
Businesses are also less likely than consumers to purchase mininotebooks,
also known as "netbooks," which represent the one bright spot of growth
for the PC manufacturing industry but, because they come installed with a
cheaper version of Windows XP, do not earn as much for Microsoft as those
higher-end systems installed with a full operating system.
will offer a stripped-down version of its upcoming OS, the Windows 7 Starter
edition, for netbooks. The Starter edition will not run certain features
present in the larger version of the operating system, such as multi-monitor
support, DVD playback and Aero Glass.
However, margins on Windows 7 Starter will likely be lower for Microsoft
than other versions, and the operating system does not reach general release
until Oct. 22. Although Microsoft's Windows 7 Upgrade Option program launched
on June 25, revenue from that is deferred until later in the year, which dragged
down Microsoft's earnings per share by 2 cents.
Microsoft also plans on investing heavily in the cloud, which Liddell termed
a "significant opportunity."
Key to its embrace of the cloud, and its larger fortunes, will be the launch
of Office 2010, which
Microsoft plans on offering as a free online service to subscribers of
Microsoft Live. Microsoft will also offer the productivity suite as a
hosted subscription service and an on-premises version, which it hopes will
give it an advantage among SMBs and the enterprise over cloud-based
productivity offering such as Google Apps.
The financial prospects for the second half of 2009 and into 2010, then,
look somewhat more promising. But at least in the short term, Liddell
cautioned, economic "macro-conditions are going to continue to trump
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.