Microsoft's fourth quarter results reveal just how much is riding on Windows 7. In a word: Everything.
As reported (Techmeme), Microsoft's client revenue was weaker than expected due to increasing sales of netbooks, a base that's still in love with Windows XP and customers that never quite got around to upgrading to Vista. Add those factors up and you have a sales hole big enough to drive a truck through.
So what's next? Microsoft waits until Oct. 22 to launch Windows 7. From there, the software giant hopes for some PC and server improvement. Analysts understand the Windows 7 card and are largely giving Microsoft a pass. That said, Windows 7 better deliver the goods.
Deutsche Bank analyst Todd Raker sums up what appears to be the consensus view for the moment:
We think the environment is difficult right now for Microsoft, but some of this performance can be attributed to temporary factors. A pause in PC purchases in front of the new OS cycle as well as some channel inventory reductions contributed to the results. We believe Win 7 will be a positive driver for Microsoft once it launches in October due to pent-up demand, opportunities for software upgrades and the positive impact on netbook OS average selling prices.
Raker added that Windows 7 will be one of Microsoft's "more successful OS releases ever."
Morgan Stanley analyst Adam Holt noted that Microsoft was always a 2010 story anyway and the weaker than expected quarter served as a tool to lower expectations for future quarters---and setting the software giant up to impress later.
Holt's report had this chart that tells the tale:
And Microsoft CFO Chris Liddell indicated that the economy seems to have bottomed. He said on the conference call:
As I said a quarter ago, we see the economy making its way through a [reset] and we expect tough year-over-year comparables for the rest of this calendar year. Having said that, there are some signs that we have at least seen the worst. We began to see sequential stabilization in some of our key businesses; for example, we saw sequential unit increases in both Windows and Windows Server for the first time in a year.
However, that picture can reverse if:
- There's a PC upgrade cycle for the first time in years;
- Windows 7 is well received;
- Windows 7 can boost netbook average selling prices for Microsoft;
- Windows 7 leads a revenue pop that hands off to the Office 2010 launch.
That's a lot of "ifs," but analysts such as Goldman Sachs' Sarah Friar are arguing that Microsoft is at its demand trough and things are looking up from here. Indeed, Windows 7, Windows Server 2008 R2, Office 2010 and Azure could provide revenue growth for quarters to come.
In the meantime, Microsoft waits.