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2008: Decision Year for RIAs - October 20-22, 2008 San Jose

Microsoft Falls Off Cliff, Keeps on Ticking
Wall Street declared Microsoft the winner over the economy

Microsoft Developer on Ulitzer

Wall Street declared Microsoft the winner over the economy Friday morning when the results of its September quarter weren't as bad as everybody thought they were going to be.

As a reward, its stock price was pushed up to the highest point since June of last year.

Still the economy put up quite a cat fight.

It gouged 18% out of Microsoft's earnings and 14% out of its revenues.

Of course Microsoft was fighting with a Vista-withered right arm and, since it didn't get the Vista-replacing Windows 7 prosthesis out until yesterday, it had to defer until this quarter the $1.47 billion in revenue that it sold in promised Win7 upgrades and sales of Windows 7 to OEMs and retailers ahead of the great launch.

Still Microsoft said it saw the highest number of Windows licenses ever sold in a single quarter.

Microsoft CFO Chris Liddell thinks the economy bottomed in the June quarter but he's still being cautious in his outlook. There are still only faint rumblings of business spending returning and he suggests it could take another two years for it to hit its old stride, though it should ramp gradually through 2010. The enterprise can't hang onto those old PCs forever and Microsoft needs that corporate business to come back.

Meanwhile, Microsoft is comforted by the fact that the consumer continues to regard the PC as something to spend money on even in the midst of a hideous recession. It said that consumer demand - particularly for the narrow-margin netbook - pushed Windows and the Xbox to exceed expectations while its own newfound cost disciplines - something it aims to hang onto - resulted in better-then-expected earnings.

The company realized $3.57 billion, 40 cents a share, in its first fiscal quarter on revenues of $12.92 billion. Operating income came to $4.48 billion, down 25%. That deferred revenue could have added 12 cents to Microsoft's earnings per share, pushing it up 8% compared to last year, and narrowing the difference in revenue year-over-year to just a 4% decline.

Analysts expected it to do 32 cents on $12.3 billion in revenue.

The only unit inside Microsoft that didn't see a drop in revenue was its Server and Tools operation whose business, which is closely aligned with the enterprise spend, was only up five-tenths of a percent. The x86 server hardware market in general was down 20% during the quarter. Microsoft pushed Windows Server 2008 R2 into the market yesterday.

Revenue at its Windows unit, which is also doing battle with a conspicuously resurgent Apple, was down 39%, with earnings down 52%. Lucky for Microsoft, PC sales worldwide rose about 2% in the September quarter. It described rebound in PC unit growth as "quick."

Microsoft's Business unit, including Office, was down 11% and its online unit, where Bing has garnered a smidge of market share lately, was down 5.8%. The Xbox unit was flat.

Liddell thinks Windows sales will be "inline with or slightly ahead of the overall PC market" while Office will lag behind the market through next June.

Microsoft's operating costs were down 10% year-over-year on cutbacks in research, administration, sales and marketing and people. Staffing was down 4% year-over-year. Microsoft had its first mass layoff this year

By way of guidance, Microsoft cut its full-year operating expense outlook by $400 million to between $26.2 billion and $26.5 billion. Its year ends in June.

Microsoft figures notebooks represented 12% of the total market while business PCs, up sequentially, still declined in the high single-digits. OEM unit sales were up 6% though revenues were down 7%; Microsoft is noticing some inventory rebuilding. It's not sure where that's going. Europe remains weak.

About Maureen O'Gara
Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at) or paperboy(at), and by phone at 516 759-7025. Twitter: @MaureenOGara

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