Microsoft Forecast: Vista is Weak, Office is Strong

Microsoft's earnings report tells the tale of Vista and Office heading in different directions.

Microsoft Corp.'s quarterly call with Wall Street on Thursday told the tale of two software franchises and their diverging financial fortunes.

Microsoft Corp.'s Client revenue, which virtually all comes from sales of Windows Vista, grew just 2% year over year to $4.22 billion in its first quarter of 2009.

"That fell pretty far short of Microsoft's expectations," said Matt Rosoff, an analyst at independent research firm Directions on Microsoft. "That's always a worry, since it's the core of the company's business."

This was the second recent quarter out of three that saw Vista sales grow sluggishly or shrink. In Microsoft's third quarter of 2008, Client revenue fell 24% year over year, although sales grew 13% year over year in the intervening fourth quarter.

Vista's weak growth was in spite of 10% to 12% growth in PC shipments. Microsoft blamed the sluggishness on flat PC sales in developed countries and zooming sales of low-cost PCs -- in particular, netbooks. Customers in developing countries are more likely to buy PCs with cheaper, basic versions of Windows Vista installed. Or, if they buy netbooks, they are likely to get Windows XP Home or Linux, which results in little or no revenue for the software maker.

As a result, sales to PC manufacturers, which supply 80% of Vista's sales, actually fell 1%. (The rest of Vista revenue comes from volume licenses to big companies and retail purchases by consumers and small businesses.)

Microsoft hopes Vista can rebound in the second quarter with 7% to 10% growth during the traditionally strong holiday season.

"We think, particularly with Christmas coming up, that overall sales will be relatively good," said Microsoft CFO Chris Liddell during the earnings call. "We have reasonably good visibility into this quarter in terms of the inventory positions. We feel pretty good about some of the initiatives that we have in the unlicensed area. We've got channel inventory down to where we would like to see it."

But Rosoff said he is "surprised they are that optimistic for the holiday quarter."

Other bellwether vendors also lack Microsoft's confidence. Chip maker Intel Corp. expressed an uncertain outlook during its earnings call earlier this month. While Phoenix Technologies Inc., which supplies BIOS software for half of all PCs made, on Thursday cut its forecast for laptop sales growth in half, to 15% from 30%.

Microsoft acknowledged that the picture for Vista sales is bleaker for the rest of the year. It expects sales to increase just 2%, meaning that revenue in the last two quarters of the year might actually fall slightly from the prior year.

This story, "Microsoft Forecast: Vista is Weak, Office is Strong" was originally published by Computerworld.

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