Microsoft Bottomed Out in June, but Windows 7 Should Spark Comeback

Microsoft reached its financial bottom over the summer, according to an analyst with Jefferies & Co., but could be positioned to take advantage of improving economic conditions in both the PC market and at large. The Oct. 22 release of Windows 7, generally viewed as successful, provides some hope for Microsoft that business and consumers will purchase its new operating system along with new PCs, boosting revenues for both Redmond and its manufacturing partners.

Microsoft likely hit its financial bottom over the summer, suggested analyst Katherine Egbert from research firm Jefferies & Co., and has a strong chance of rebounding as both the economy and the tech sector continue to dig themselves from a longstanding economic recession.

"Strong Client and Xbox revenue and continuing cost control lead to a surprisingly strong September," Egbert wrote in an Oct. 26 research note. "June was probably the bottom."

A recovery in IT spending, coupled with new flagship products such as Windows 7 and Office 2010, could potentially boost Microsoft's prospects into 2010.

On Oct. 23, Microsoft reported a 14 percent decline in year-over-year revenue for the first quarter of fiscal 2010, earning $12.92 billion. Those numbers, however, were cited by both Wall Street analysts and Microsoft executives as better than earlier estimates, leading to expressions of optimism that the company was on the financial upswing; opening trading on that day saw Microsoft's shares rise 8 percent.

In a statement preceding the Oct. 23 earnings call, Microsoft chief financial officer Chris Liddell also cited Microsoft's "cost discipline" as a key factor in Redmond's brightened prospects, allowing the company "to drive strong earnings performance despite continued tough overall economic conditions."
Those numbers were far cheerier than last quarter, when Microsoft reported a 17 percent decline in year-over-year revenue, with earnings coming in at $13.10 billion. A decline in PC and device sales proved devastating to the company's bottom line. Microsoft and its ecosystem partners hope that the release of Windows 7 on Oct. 22 will compel a tech refresh on the part of both consumers and businesses.

"We expect to see increased marketing and merchandising focused on the upgrade buyer and the multi-PC household opportunity that dovetails with the Win 7 story," Stephen Baker, an analyst with The NPD Group, wrote in an Oct. 22 blog posting. "And of course we will be waiting with bated breath for the opening of the new Microsoft stores and how Microsoft tries to interpret the retail interaction between consumer and PC and buying experience."

Baker cited studies showing that some 25 percent of households have desktops running Vista, and 40 percent have notebooks running Microsoft's now-last-generation operating system. A separate report from research firm Forrester found that 80 percent of all commercial PCs are running Windows XP, whose extended support for Service Pack 3 will expire in April 2014. Many of these operating systems are running on aging PCs, which has led to hopes on the part of manufacturers that consumers and IT administrators will use the Windows 7 release to upgrade to new machines-if economic conditions have left them with the budget to do so.

But not everyone sees the release of a new desktop-based operating system as a good thing.

"The best thing Windows 7 has going for it is that it is not Vista," chairman and CEO Marc Benioff said in a statement released before the Windows 7 launch. "The truth is that the operating system is irrelevant now. It's all about the cloud-cloud applications for consumers and businesses, and cloud platforms like, Amazon Web Services, and Google App Engine."

Despite the growing use of cloud platforms and applications, at least some businesses continue to see utility in desktop platforms. A Forrester survey of 653 PC decision-makers at North American and European enterprises and SMBs (small- to medium-sized businesses) found that six out of 10 firms plan on moving directly to Windows 7, while 1 percent planned "to migrate from Windows to a different platform."

In any case, Microsoft sees the success of Windows 7 and its other ventures as irrevocably tied to the larger PC market.

"Windows division revenue will be in line with overall PC growth," Liddell said during the company's Oct. 23 earnings call, before suggesting that "our strategies will position us to take advantage of the economic recovery."