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Microsoft's Third-Quarter Revenues Drop

Microsoft announced its fiscal third-quarter results for 2009, which showed an overall six percent decrease in revenue compared with last year's Q3 result.

• By Kurt Mackie
• April 23, 2009

The company earned $13.6 billion in revenue for the quarter, which ended on March 31, 2009. That's down from $14.4 billion in the previous year's fiscal third quarter. The losses were mostly attributed to declining sales of new Windows-based PCs.

The company had some overall revenue increases from software licensing renewals, but those profits were offset by the Windows client and other losses during the quarter.

Net income plunged 32 percent compared with the previous year's third quarter result, decreasing to $2.9 billion from $4.4 billion in 3Q 2008. The main reason given for the revenue decline included "weakness in the global PC and server markets," according to Microsoft's announcement.

The quarter represented perhaps "the most difficult environment Microsoft has faced in its entire 30-year history," according to Chris Liddell, Microsoft's senior vice president and chief financial officer, in a conference call.

Windows client revenue, a traditional Microsoft cash cow, declined 16 percent to $3.4 billion in the third quarter of 2009 vs. $4.0 billion in the same period last year. OEM sales of new PCs with Windows declined 16 percent.

Bill Koefoed, Microsoft's general manager of investor relations, estimated in a conference call that the overall PC hardware market had declined seven percent to nine percent when comparing third quarters. He added that "traditional or non-netbook PCs were down 15 percent to 17 percent compared with the year-ago quarter."

Netbook shipments represented "about 10 percent of the PC shipments" for the quarter, Koefoed said.

Microsoft's server and tools revenue was $3.5 billion, up seven percent from $3.2 billion in last year's fiscal third quarter. That revenue increase was driven by premium editions of Windows Server 2008 and SQL Server 2008, as well as Microsoft's System Center management suite, Koefoed said.

Microsoft's consulting and support services for the server and tools business division grew six percent. However, server hardware sales showed a decline.

"Revenues from the transactional and OEM portions of the business declined over 15 percent during the quarter in line with the estimates of the underlying x86 server hardware market," Koefoed explained.

Liddell said that the only "pockets of stimulus" for Microsoft in its third quarter were the sales of Windows on netbooks, Microsoft Office (retail) and the Xbox gaming console. He added that the enterprise business segment had held up and that licensing renewal rates "were stable."

Microsoft expects a $26.7 billion to 26.9 billion operating expense guidance for its full year, which will end on June 30, 2009. That figure will include severance charges associated with Microsoft's employee layoffs, according to the company's statement.

The third-quarter 2009 financial results included a charge of $290 million for severance charges. Microsoft's 10-Q statement (Word file) for this period indicated that "approximately 1,100 employees" were cut during the quarter. In addition, the company plans to cut "approximately 3,400 employees" by June 30, 2010.

Microsoft had announced its first company-wide layoffs in the company's history back in January, when it described a plan to cut 5,000 employees over 18 months' time. The company initially announced cuts of 1,400 employees at that time, but it subsequently indicated plans to add 2,000 to 3,000 new jobs in the coming year.

Liddell said that Microsoft expected to see continued weakness in traditional PC shipments, excluding netbooks, in the near future. That weakness also will extend into the business PC market, he added. "It will remain difficult in the fourth quarter," he predicted.

Microsoft's online advertising revenue decrease was 13 percent, which was what Yahoo also reported, according to Matt Rosoff, an analyst at Directions on Microsoft, in a phone briefing. He noted that Microsoft continues to spend "a lot of money on search."

Rosoff predicted that Windows revenues would continue to decline "at least through next quarter." Possibly, the upcoming release of Window 7 would result in a retail sales boost -- mostly from consumers upgrading from Vista, he added. Microsoft has yet to announce a release date for Windows 7, but rumors suggest it could happen as early as this fall.

Rosoff also noted that Microsoft's expense burden was somewhat lightened in this 2009 third quarter relative to the last one. For example, in the third quarter of 2008, Microsoft paid off a European Union fine of $1.5 billion, he explained.

Some upcoming products were announced during the conference call, including Microsoft Exchange 2010, which will be available for sale in the second half of calendar-year 2009, Koefoed said. Windows Mobile 6.5 will be running on smartphones by the fourth quarter of this year, he added.

In the next 12 months, Microsoft is planning the release of Windows 7, Office 2010 and a new search product, Liddell said.