Windows 7 Sells Well, but Microsoft Isn't Out of the Woods Yet

Microsoft's Windows 7 sold well in its first few days of release, according to an analyst report, but declining revenues and suggestions of a slow-paced tech refresh suggest that Microsoft could face at least a few more quarters of stagnant revenues as it seeks to recover from the massive economic recession. This week saw Microsoft cut 800 more jobs from its payrolls, as it continues to consolidate and trim costs in an effort to streamline.

At least we know one thing, numerically speaking: Windows 7 isn't Vista.

Microsoft received a bit of good news this week when a report by NPD Group suggested that early sales of Redmond's new operating system had exceeded those of Vista during the same timeframe-by a fairly impressive 234 percent.

That was likely due to Microsoft's combination of massive promotional engine and widespread discounts. The NPD Group analyst Stephen Baker suggested in a Nov. 5 statement that "in a slow environment for packaged software, Windows 7 brought a large number of customers into the software aisles."

PC sales spiked in the week following Windows 7's Oct. 22 launch date, rising 95 percent over the week previous to the rollout. A separate report by statistics company Net Applications suggested that the operating system was rapidly gaining market share; and in remarks to the press in Tokyo, Microsoft CEO Steve Ballmer termed the early sales figures "fantastic."

Despite those sales figures, however, don't count Microsoft as out of the economic woods quite yet; the company had a fairly substantial amount of damage over the past year, and it will likely take more than a few weeks of positive operating system sales to reverse some negative macro-trends.

On Nov. 4, the day before the NPD Group's relatively upbeat report, Microsoft confirmed that it will cut an additional 800 employees from its payroll, completing the 5,000-employee layoff cycle announced earlier this year. As of Oct. 23, Microsoft had 91,005 employees worldwide, some 54,923 of them in the United States.

With the cutting of those 800 employees, Microsoft actually exceeded its original 5,000-job-cut estimate from January 2009. A Microsoft spokesperson issued an official statement to eWEEK suggesting that "continuing to manage our business closely, as we always do, can mean additional headcount adjustments."

In the face of an economic recession driving down PC sales and, by extension, Microsoft's revenue figures, Redmond has engaged in a widespread internal campaign of "cost discipline" throughout 2009. The job cuts were a part of that; Microsoft has also devoted considerable attention this year to killing various legacy programs, such as Money Plus and Encarta, in favor of consolidating around flagship platforms and applications such as Windows and Office.

Despite the NPD Group's strong sales numbers for Windows 7, which may well be confirmed by other analysts in coming weeks, Microsoft's fortunes into 2010 will be dependent on whether economic conditions improve-and with them, peoples' budgets for IT equipment.

For the first quarter of fiscal 2010, Microsoft reported revenues of $12.92 billion, a 14 percent decline year over year from 2008. At the same time, operating income, net income and diluted earnings fell 25 percent, 18 percent and 17 percent year over year, respectively. If you factored in the $1.47 billion in revenue deferred due to the Windows 7 Upgrade Option program and sales of Windows 7 to OEMs and retailers before the Oct. 22 launch date, then the overall revenues rose to $14.39 billion-a comparatively smaller 4 percent decline.

Following the Oct. 23 earnings call reporting those figures, Microsoft shares jumped on Wall Street-despite the declining revenues, both financial analysts and Microsoft executives breathed a sigh of relief that the earnings were higher than previous estimates.

But the big question remains: Will a tech refresh actually happen in 2010? Microsoft Chief Financial Officer Chris Liddell suggested that his company was "reasonably cautious" about the prospect of consumers and the enterprise purchasing PCs and Microsoft products.

If nothing else, according to analysts, aging hardware and software will eventually compel customers to adopt new systems.

"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."

A series of separate reports issued by other firms over the summer suggested that businesses will have a need to engage in a tech refresh, but the reports differed when it came to suggested timeframes. Deutsche Bank's internal survey of 120 IT buyers around the world found that Windows 7 adoption would begin "within 12 to 18 months," while a report by ScriptLogic estimated that a large percentage of U.S. businesses would only begin their updating to the new operating system by the end of 2010.

Particularly within the enterprise, the adoption of other Microsoft products may follow a similar pattern. But slower adoption rates mean that Microsoft faces at least another few quarters of stagnant revenues. Windows 7 may have proved to be a short-term success, but it may be another year or more before its full impact on Microsoft's fortunes can accurately be gauged.