News

Microsoft Holds Down Losses in 1Q 2009

• By Kurt Mackie
• October 23, 2009

Microsoft disclosed its fiscal first-quarter results, reporting an 18 percent decrease in net income compared with 1Q 2008.

The report was bad tidings, but relatively so considering the overall prolonged economic downturn in the world economy. Net income was $3.6 billion in the company's first quarter (which ended on Sept. 30, 2009) compared with $4.4 billion in the year-ago quarter. Still, analysts briefed by Microsoft on Friday generally congratulated the company for having a good quarter.

Chris Liddell, Microsoft's chief financial officer, offered a message that doubtless was music to the ears for the number-crunching analyst crowd. Overall operating expenses declined between the quarters to $8.4 billion in 1Q 2009 vs. $9 billion in the year-ago quarter.

"We realized a 10 percent decrease in operating expenses over the prior year due to lower number of people employed, lower cost per person, lower vendor spend and lower marketing costs," Liddell said in a Webcast. "Our headcount at the end of the quarter was four percent lower than the same time last year -- the first time that a reduction of that significance has been achieved in the company's history."

The first-quarter report came on the heels of big news: Microsoft's public launch of Windows 7 on Thursday. Consumers can now buy Microsoft's newest operating system, as well as PCs running it, at retail and online stores. In addition, Microsoft launched its first retail store in Scottsdale, Arizona. Other product highlights for the quarter include Microsoft's earlier launch of Windows Server 2008 R2 and the "release to manufacturing" of Exchange 2010.

Microsoft's overall revenue figure of $12.9 billion for the first quarter is somewhat askew because of $1.5 billion in deferred revenue resulting from the company's Windows 7 Upgrade Option program offered to Vista buyers in June. When that revenue is factored in, Microsoft's overall revenue showed just a four percent decrease, year over year, according to Microsoft's report.

Liddell credited "strong consumer demand for Windows" plus the company's "cost discipline" for Microsoft's financial results in a down economy. In a Q&A session with financial analysts, Liddell suggested that people will still buy PCs in bad economic times, citing "the robustness of the PC." Commercial retail sales of Windows have increased two percent so far due to Windows 7, he said.

However, Liddell did note that slumping business demand for new PCs have dragged down Microsoft's numbers. Microsoft sees a potential for a corporate PC refresh cycle happening sometime in 2010, he added. Feedback from corporate customers on Windows 7 has been good, and preorders have been "extremely good" but have had a "modest financial impact," Liddell said. Part of the business PC spending slowdown can be attributed to corporate budgets being set in December, he added.

Many businesses deferred buying Windows Vista, Microsoft's last OS. They stuck with Windows XP after encountering initial driver issues with Vista. However, analyst firm Gartner has suggested that IT organizations should plan to get off Windows XP, which currently runs on the majority of business PCs, by the end of 2012. Gartner suggests that a PC refresh cycle at the corporate level could start late next year.

"The Windows 7 release will generate renewed interest in hardware upgrades in consumers and small businesses following its release, but corporate demand is not expected to gain momentum until the end of 2010," said Charles Smulders, managing vice president at Gartner, in a released statement. "An overdue PC hardware upgrade cycle, and the economic environment, will be as equally important as Windows 7 in determining final demand in 2010."

Gartner expected to see a worldwide decline in PC shipments in the third quarter of 2009. Instead, its preliminary results showed a "0.5 per cent increase" compared with last year's third quarter.

Other Microsoft divisions -- such as Server and Tools, Microsoft Business Division, and Entertainment and Devices Division -- showed flat revenues quarter over quarter. Liddell suggested that server shipment trends might improve by the end of the year.

The Online Services Division appears to be the money loser at Microsoft. The division took in $30 million less revenue quarter over quarter. It showed an operating income loss of $480 million vs. a loss of $321 million in the year-ago quarter.

Microsoft's ad revenues overall were down three percent in the first quarter, according to Liddell. However, search revenue was up by "single digits" in the U.S. market, he added.

Microsoft is still seeking regulatory approval for its Bing search advertising deal with Yahoo, which Microsoft hopes to see happen in "early calendar-year 2010." As part of the deal, Microsoft will pay for setup costs ranging from $100 million to $200 million and will see "virtually no revenue contributions" in the fiscal year. If the deal goes through, Microsoft could see revenue earnings in its fiscal-year 2011, Liddell explained.