Microsoft Sees Stronger Earnings than Expected, Believes in Tech Refresh

Microsoft announces another quarter of revenue declines, but results were still stronger than expected, thanks to what Microsoft executives referred to as "cost discipline" and a streamlining of business divisions. With the release of Windows 7 on Oct. 22, consumers and businesses may be in the mood to buy new PCs and Microsoft products.

Microsoft reported another quarter of declining revenue for the first quarter of fiscal 2010. Nonetheless, Wall Street analysts and Microsoft executives both seemed satisfied with the results, which were stronger than earlier estimates. The Oct. 23 announcement came a day after Microsoft launched Windows 7, the newest version of its operating system.

Microsoft's revenues of $12.92 billion represented a 14 percent decline year-over-year from 2008. Operating income, net income and diluted earnings per share for the quarter declined 25 percent, 18 percent and 17 percent, respectively, over the same quarter in 2008. Nonetheless, opening trading on Wall Street saw Microsoft's shares leap 8 percent.

In a statement before the Oct. 23 earnings call, 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."

For the fourth quarter of 2009, Microsoft had reported a 17 percent decline in year-over-year revenue, with earnings of $13.10 billion. The economic recession and attendant decline in PC sales has had an accompanying effect on Microsoft's bottom line, reducing demand for its core products such as Windows.

Click here to see 12 ways Windows 7 can make life easier for IT pros.

Microsoft reported that it was deferring $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 launch date of Oct. 22. With that money reintegrated into the bottom line, Microsoft's overall revenues became $14.39 billion, a year-over-year decline of only 4 percent.

During the earnings call, Liddell suggested that there could be proverbial "green shoots" ahead for Microsoft if the economy and PC sales pick up in 2010.

"Windows division revenue will be in line with overall PC growth," Liddell said, adding, "Our strategies will position us to take advantage of the economic recovery."

With regard to the larger industry, Liddell suggested that "CIOs remain cautious about spending through the end of the year," which may set the expected beginning of a tech refresh throughout the enterprise and small and midsize businesses in 2010. Liddell also suggested that a tech refresh might be a more gradual process extending beyond 2010 into the next few years.

In line with that thinking, Microsoft is staying "reasonably cautious" about the Windows 7 upgrade cycle, according to Liddell. Even so, "Feedback is good at this stage from corporate in terms of Windows 7."

Microsoft's Windows XP currently runs on 80 percent of all commercial PCs, according to a report from research company Forrester. Despite the stability of that platform, however, support from Microsoft and ISVs will gradually decline, with extended support for Windows XP Service Packs 2 and 3 ending in April 2014.

That ending of support, combined with new business-focused features in Windows 7, may finally persuade businesses that base their IT infrastructure on Microsoft's products to complete the transition to the newer operating system.

Windows 7 features cited by analysts as particularly useful to the enterprise include DirectAccess, which attempts to simplify connectivity for Mobile users, BitLocker and BitLocker To Go, which secure data on hard drives and removable USB thumb drives, and AppLocker, which delivers more granular control of user applications.

A Forrester survey of 653 PC decision makers at North American and European enterprises and SMBs found that six out of 10 companies plan on moving directly to Windows 7. In that survey, 1 percent of respondents reported they planned to "skip Windows 7 and wait for the next release," and 1 percent planned "to migrate from Windows to a different platform."