News

Microsoft Hits New Lows in 4Q Report

• By Kurt Mackie
• July 24, 2009

Microsoft's financials continued to decline, with the company reporting $13.1 billion in revenue for its fiscal fourth-quarter -- a 17 percent decrease compared with last year's fourth quarter.

Net income for the fourth quarter was $3 billion, compared with $4.3 billion in last year's fourth quarter. Microsoft published those results on Thursday, reflecting its fiscal fourth quarter and year, which ended on June 30, 2009.

Chris Liddell, Microsoft's chief financial officer, indicated that Microsoft had felt the bite of a generally bad economy.

"The fourth quarter marks the end of one of the most difficult, but in some ways encouraging fiscal years in our company's history," Liddell said in a recorded Webcast. "And our estimated results were disappointing due to the poor macroeconomic environment."

Liddell added that Microsoft actually executed much better in fiscal-year 2009 than in the previous year across all aspects of the business, citing product shipments, sales and cost-cutting efficiencies.

For the fiscal year, Microsoft's revenue was $58.4 billion, a decrease of three percent compared with fiscal-year 2008 revenue.

Still, the numbers for the quarter didn't look good. Microsoft's 4Q revenue missed projections, and it was down across all business segments, which may be a historical first for the company.

"They [Microsoft] did miss consensus revenue estimates pretty seriously by about a billion dollars, and this is the first time I'm aware of in Microsoft's history that their year-over-year revenue fell in all five business segments, including the Server and Tools and Business segments," said Matt Rosoff, an analyst with Directions on Microsoft, in a conference call with the press. "Overall revenue was down 17 percent from the prior year, which was a record."

Microsoft's Windows client business segment, a traditional cash cow, didn't fare well. The OEM premium-standard mix was down 13 percentage points on the higher priced premium side. The volume of OEM client licenses decreased 10 percent in the quarter. Revenue from the OEM channel decreased 31 percent. Microsoft typically gets more than 80 percent of its total client revenue from the OEM channel.

The decreased Windows client revenue was partly ascribed to a Windows 7 discount, or "upgrade option" program, which ended on July 11 in the U.S. and Canadian markets. About $276 million in revenue was deferred as a result of the offer.

Microsoft had offered a similar discount with Vista, but about $1 billion in revenue was deferred back then, according to Frank Brod, Microsoft's corporate vice president of finance and administration and chief accounting officer.

Rosoff suggested that "business PC sales are slowing down much faster than consumer PC sales" for Microsoft. Moreover, on the consumer side, netbooks with Windows XP Home edition are selling, but also cutting Microsoft's profits. Rosoff said Microsoft is expected to offer Windows 7 on netbooks, but at a higher cost.

The Server and Tools segment had a six percent revenue decrease "primarily due to decreased Windows Server and SQL Server revenue, partly offset by increased Enterprise CAL Suites and System Center revenue," according to Microsoft's report.

Rosoff noted that the six percent decrease was a new low from when Microsoft first started reporting on the Server and Tools segment. Liddell acknowledged a bad server hardware market, but said he thought it had reached its bottom.

Microsoft's unearned revenue figure includes volume licensing revenue, reflecting three-year licensing agreements with large companies, particularly enterprise contracts. The revenue for volume licensing was $11.3 billion in fiscal-year 2009, down from $12.2 billion last year.

Rosoff said that this was a particularly important quarter for unearned revenue and enterprise agreements because a lot of them were signed three years ago and expired during the quarter. Still, he said that the specific figures for unearned revenue in the Server and Tools segment suggested that Microsoft was doing a good job in getting companies to pay ahead of time for Windows Server 2008 and SQL Server CALs.

Microsoft provided operating expense guidance for its next fiscal year, suggesting it would range from "$26.6 billion to $26.9 billion." In fiscal-year 2009, Microsoft's operating expenses totaled $38 billion.