Microsoft Earnings: No Escaping Global Recession
Results posted on July 23 were dismal, but could have been worse.
By Warren Wilson
The results Microsoft posted yesterday for its fiscal 2009 fourth quarter and full year were dismal. Gross revenues were $13.10 billion for the quarter, down 17 percent from the year before, and $58.44 billion for the full year, down 3 percent from the prior year. Net income was worse: $3.0 billion for the quarter, down 29 percent; and $14.6 billion for the full year, down 18 percent.
Every segment suffered. The Windows client division was off 29 percent for the quarter, 13 percent for the year. The Business division (which includes the Office cash cow and the Dynamics family of ERP and CRM applications, and is the company’s largest segment) was down 13 percent for the quarter, but flat for the full year. The Entertainment and Devices division was down 25 percent for the quarter and 6 percent for the year.
Only the Server and Tools segment, the second-largest after the Business division, was relatively unscathed–down 6 percent for the quarter but up 8 percent for the year. Those results look even stronger in the context of a server hardware market that is down more than 20 percent.
In fact, as bad as the numbers looked, they could have been worse–and would have been if Microsoft hadn’t instituted stringent cost-control measures, including the first layoffs in its history.
With the global economy no longer in free-fall, the worst seems to be over. The economy’s recovery promises to be long and slow, so Microsoft faces several months of bumping along the bottom along with everyone else. But after that, the picture begins to brighten.
A wave of new products–and some lingering issues
The three biggest reasons for optimism are the impending releases, starting in October, of Windows 7, Windows Server 2008 R2, and Office 2010. Windows 7 has been getting rave reviews and should finally allow Microsoft to close the door on the nightmare known as Vista. In fact, some of the weakness in the most recent results probably reflects customers holding off on Vista purchases in anticipation of Windows 7 becoming available soon.
The recent results also reflect a decision by many organizations to stretch out their desktop and laptop refresh cycles. At some point they have to buy new equipment–a decision that becomes easier as the economy begins to improve and Windows 7 provides an attractive option.
The next version of Microsoft’s flagship server product, Windows Server 2008 R2, will also be available in October, bringing new virtualization capabilities, new management tools, and a new version of Internet Information Services.
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Next year, the vendor will launch a major upgrade of its productivity suite, Office 2010, with a slew of enhancements, including an overhaul of the navigational “ribbon” to make it simpler and more intuitive to use. The new year will also bring new versions of Windows Mobile, SharePoint Server, and Exchange Server.
With this wave of product upgrades, Microsoft aims to regain its momentum after a period made difficult not just by the recession and the Vista problem, but by its long struggle to counter Google’s threat in Internet search and its failed bid to acquire Yahoo despite offering to pay $44.5 billion.
Its new search tool, Bing, has been well received. Although it remains to be seen how much market share Bing can take away from Google, at least Microsoft now has a credible entry in the field.
Microsoft still faces big challenges in entertainment, where its Zune music player and Xbox console continue to struggle against their main competitors, Apple’s iPod and the Nintendo Wii, respectively. And then there are netbooks, the lightweight, inexpensive laptop alternatives on which about 10 percent of users have chosen to run Linux, not Windows.
Still, it appears that the most recent quarter will mark the low point for Microsoft, after which it will ride out the rest of the recession and then–on the strength of the new Windows, Windows Server, and Office releases–begin to regain its stride.
WARREN WILSON is research director at Ovum, a global advisory and consulting firm that focuses on the commercial impact of technology, regulatory, and market changes.
