In the financial quarter that just ended, arguably one of its most important quarters ever, Microsoft had a chance to bounce back after an unprecedented year-over-year revenue drop last quarter.
But it was not meant to be. Microsoft yesterday reported historically poor earnings for the fourth quarter of fiscal 2009.
Overall, the company earned $3.05 billion, or 34 cents per share, on revenue of $13.1 billion, down 17 percent from the year before, which is a record decrease for the company. Year-over-year revenue fell in all five business segments, also a first.
Total quarterly revenue of $13.1 billion was north of one billion dollars less than Wall Street's expected revenue of $14.3 billion.
Windows client revenue got the worst of the pain, down 29 percent from the year before, although some Windows revenue ($276 million) was deferred as part of Microsoft's Windows 7 Upgrade Option program announced June 25.
The main reasons for Microsoft's continued financial struggles: businesses are delaying PC upgrades due to the bad economy and consumers are opting for low-cost netbooks running Windows XP Home, which does not generate as much revenue for Microsoft as Windows Vista.
As the Economy Goes, so Goes Microsoft
What's become clear from Microsoft's latest earnings, according to industry analysts, is that the company's earnings are an indicator of the sorry state of the economy.
"Because Microsoft is so broad, it reflects the global economy," said Matt Rosoff, an analyst with independent research firm Directions on Microsoft, in a call with reporters.
It's logical: Microsoft makes most of its money selling to businesses and most businesses are tightening their belts to survive. Much of Microsoft's year-over-year revenue declines can be blamed on companies that were buying Microsoft software a year ago that have downsized or, in some cases, don't exist anymore.
"Microsoft sells a lot of its multi-year software contracts by the seat, so if a company is losing employees and an enterprise agreement is up, a company will say we don't have10,000 seats anymore. We want a smaller contract than we had last time."
But Rosoff posits that Microsoft will also ride the wave when the economy bounces back.
"When the economy is down, Microsoft falls farther than other companies. But when the recovery starts, you'll probably see Microsoft pick up faster than competitors," he says.
On the Bright Side....
Though Microsoft's earnings were dismal, analysts indicate that the software giant may have hit bottom this quarter and the next few quarters show promise. Why? Because Microsoft has a stockpile of revenue-generating products ready to strike.
According to Warren Wilson, research director at technology consulting firm Ovum, Microsoft will struggle for a few more quarters, but the picture will brighten with the releases of Windows 7, Windows Server 2008 R2 in October and Office 2010 next year, and as search tool Bing matures and chips away at Google's search market share.
"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," Wilson wrote in a recent report.
Rosoff is more cautiously optimistic, saying that Microsoft's product pipeline is the strongest it's been in two or three years and that Windows 7 will provide a once-in-every-five-years type spike in retail revenue because it's a new OS. Additionally, Windows 7 will run on hot-selling netbooks and generate more revenue than current netbook OS, Windows XP, he says.
"That will help in Q2 and Q3 a little bit," adds Rosoff.
Rosoff says that Microsoft will benefit if it provides more incentives to enterprises to buy licenses for Windows 7 for multi-year agreements, and adds that the wave of Office, Exchange and SharePoint products in 2010 will also help generate revenue.
Regarding Microsoft's Bing search engine, Rosoff says there won't be huge progress with it in this fiscal year unless Redmond signs a search and online advertising deal with Yahoo.
"Microsoft is dead set on competing in search," he says. "Yahoo is looking to save costs and let Microsoft do the heavy lifting, while still earning some ad revenue from search. Basically everybody's online advertising revenue is down except for Google. So I think a deal between Microsoft and Yahoo is quite likely."