Microsoft's client revenue skids; Blame netbooks, Windows 7 deferrals

Microsoft's client revenue skids; Blame netbooks, Windows 7 deferrals

Summary: Microsoft's fourth quarter earnings were better than expectations excluding items, but the software giant's client (Windows) revenue skidded 29 percent compared to a year ago. For the three months ended June 30, Microsoft's client revenue was $3.

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Microsoft's fourth quarter earnings were better than expectations excluding items, but the software giant's client (Windows) revenue skidded 29 percent compared to a year ago. For the three months ended June 30, Microsoft's client revenue was $3.1 billion, down from $4.36 billion a year ago. That slide in Windows revenue led to a quarterly sales shortfall of more than $1 billion relative to Wall Street estimates.

What's going on? More netbooks are being sold and that's hurting Microsoft's pricing power. PC demand isn't so hot either. The refrain: Microsoft saw soft demand for its premium lines.

For the fourth quarter, Microsoft reported net income of $3.05 billion, or 34 cents a share, on revenue of $13.10 billion, down 17 percent from a year ago. That fourth quarter tally (statement) includes $276 million of Windows 7 revenue deferred. That deferral dinged earnings by 2 cents a share. Meanwhile, there were a few other moving write-offs. Microsoft's fourth quarter results included $193 million in charges, $108 million in bum investments and $40 million in severance costs. Those items reduced earnings by another 2 cents a share.

Wall Street was expecting earnings of 36 a share on revenue of $14.37 billion. On a conference call, Microsoft CFO Chris Liddell said:

We don't expect conditions to improve much, but we don't expect them to worsen either.

But the client revenue was the real headline. Microsoft explained it this way:

Client revenue decreased primarily as a result of PC market weakness, especially PCs sold to businesses, and a 13 percentage point decline in the OEM premium mix to 59%. Revenue growth from Windows operating systems was also impacted by a $276 million deferral for the Windows 7 Upgrade Option program. OEM revenue decreased $1.1 billion or 31%, while OEM license units decreased 10%. Based on our estimates, total worldwide PC shipments from all sources declined approximately 5% to 7%, driven by decreased demand in emerging and developed markets.

This slide says it all:

To put some perspective on Microsoft's client revenue, Deutsche Bank analyst Todd Raker was expecting Windows to generate revenue of $3.61 billion, down 17.5 percent from a year ago. Even factoring in the Windows 7 upgrade program Microsoft missed the client revenue mark.

Analysts had become more upbeat about Microsoft's client revenue following positive PC unit data and Intel's results. However, when those units are netbooks Microsoft has problems. What's good for Intel isn't good for Microsoft these days. In addition, Vista has played out so Microsoft is in limbo until Windows 7 launches.

Liddell said that "business continued to be negatively impacted by weakness in the global PC and server markets."

A few more key points from Liddell:

  • Business was disproportionately bad relative to weak PC demand. Higher average selling price won't come back until business demand returns.
  • Microsoft would buy back shares if there were a confident bottom in market.
  • Microsoft has "little potential to lower expenses for the rest of the year."

For the year, Microsoft reported net income of $14.57 billion, or $1.62 a share, on revenue of $58.44 billion. Sales were down 3 percent from a year ago and net income fell 18 percent.

As for the outlook, Microsoft only said that its expenses would be $26.6 billion to $26.9 billion for fiscal 2010.

Here's the breakdown of Microsoft's results by business unit and my notes:

Odds and ends worth noting:

  • Online ad revenue was down 14 percent for Microsoft.
  • Server and tools revenue was hit by the fall in server sales.
  • The business division (Office, SharePoint and CRM) held nicely. CRM hit 1 million seats and Sharepoint revenue grew at a double-digit clip. Microsoft says: "Consumer revenue decreased $289 million or 30%, primarily as a result of PC market weakness, a shift to lower-priced products, and pricing promotions on the 2007 Microsoft Office system."
  • The company ended the quarter with $6.07 billion in cash and equivalents and $25 billion in short-term investments.

Topics: Enterprise Software, Banking, Microsoft, Mobility, Operating Systems, Software, Windows

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74 comments
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  • How can they blame ...

    ... netbooks when they have 97% of the market?

    Is there an untold story?

    ^o^
    <br>
    n0neXn0ne
    • It is quite simple

      but you really have to understand the market/stock market.

      Easy way of saying it: Windows has taken 90% of the netbook market, but at a reduced profit.

      It does not indicate they made no money or lost money, instead they made sales, just not the same amount as they did last year when netbooks were not selling, but instead full sized laptops.

      Nothing untold, it says it right there in their earning statements, which show sales up 18 percent, but income down due to the overhead they (as many companies had been stuck with) had to car with a decrease in sales across the markets.

      Should shape up pretty well with the now lowered operating costs and Windows 7 on the horizon
      GuidingLight
  • Wait, I thought cheap was good. 'Lauren' congratulated herself

    for not being able to afford a Mac, and went cheap, cheap, cheap. And now we find out that basing your business model on cheap means you make less money? Who would have guessed?
    HollywoodDog
    • Which Lauren ad promoted netbooks?

      Can you name it please? No? Maybe because none were made. MS makes the same amount of money on the OS for $600 PCs as they do on $6,000 PCs so your comment makes 0 sense.

      And yes, MS makes less money on netbook OS sales than they do on "full" computer OS sales but they still make profit. See, the business model there is that some profit is better than $0 profit. Make sense?

      And MS still made more profit than Apple + all Linux distros combined so as much as you like slamming their business model, it is still serving MS pretty well. :)
      NonZealot
      • Good luck with that dying model

        @NonZealot
        I think you are of a handful of people who think this is a good long-
        term strategy. MSFT's days are coming to an end. Not that they will go
        under any time soon. But take what is happening today and expand it
        out another year or two. Crappy PCs and laptops will continue to
        become less expensive and HP, Dell, etc. will force MSFT to take a
        smaller and smaller slice of the pie. MSFT has nothing new up their
        sleeves. Everything they do outside of their OS and Office sales is a
        loss or barely making any money for them. Look at what they have in
        cash reserves! My gosh, they had $60B just two years ago! What in the
        world happened to all that cash? I'll tell you: huge business blunders
        and no vision from Ballmer. If I were the shareholders, I would
        demand his head on a platter.

        The charade is over. MSFT's best days are way behind them. I will not
        miss them one bit.
        Blad_Rnr
        • LOL

          [i]MSFT's days are coming to an end.[/i]

          Been hearing this for 10 years now. Hey, one of these centuries you guys are bound to be right! It isn't likely that MS will be around 1,000,000 years from now. :)

          [i]My gosh, they had $60B just two years ago! What in the world happened to all that cash?[/i]

          They bought back billions of dollars in stock.

          [i]MSFT's best days are way behind them.[/i]

          So are Michael Jordan's but I bet he could still whip you good in basketball. Also funny how what you say is 100% true and yet MS, with their best days behind them, still make more profit than Apple + all Linux distros [b]combined[/b]. Not bad at all, right? :)
          NonZealot
          • Really?

            How many employees do they have? Four times as many as Apple.
            They should be making more money.

            So they bought back all that stock and it's dropping like a lead
            balloon. Brilliant. Buying it back and paying a dividend is the only way
            they can keep the stock propped up as badly as it is. This is business,
            not Apple vs. MSFT. And Ballmer is a horrible CEO.

            They don't have any new ideas. Seriously. Windows 7? That's it? How
            wonderful could it be on a crappy $300 laptop? How much money in
            that pie is their to go around? Not much. I don't know why that's so
            hard to understand. It's failing model. One that worked when PCs
            were $3000. But when there is no differentiation, it becomes dog eat
            dog. Apple avoids that because they differentiate to some extent, and
            they have iPods and iPhones, and iTunes and App Stores to add to
            their business. It's called thinking outside the box. Something MSFT is
            always late to the game in doing.

            The old model of the OS is over. Apple innovates and they are being
            rewarded for it, like it or not. They are growing IN A RECESSION. MSFT
            is acting like it's still 1998. And they are being rewarded for that
            business model by a ~28% loss in revenue YOY.
            Blad_Rnr
          • I agree with you

            I think you make some very good points.

            I have also seen the pattern many responders use to counter arguments on this site is to use borderline nastiness, character assassination, quasi name calling and a general "Holier-Than-Thou" attitude to most any topic being discussed.

            Frankly I have found much of their commentary to loose credibility in the delivery and fail in the logic and fact categories.

            This brings to mind a joke I recently heard;
            Q: How do you annoy and confuse a "liberal?"
            A: Use Facts and Logic.

            On this site I think we can replace the word "liberal" with some of the people I described above.
            benjaminbsawyer
        • MS haters have been saying the same thing for at least the last 10 years...

          <i>The charade is over. MSFT's best days are way behind them. I will not miss them one bit. </i>

          I've been hearing the same comments from the MS haters for at least the last 10 years. And, MS is still here and expanding their product offerings. A dying company does not add to their product lines and it does not seek to diversify into the territories of its opposition. A company with the breath and scope of a MS has a lot better chance at survival through bad times than a company which depends on mostly one or two or a few products.

          BTW, haven't you heard? The worldwide economic decline of the last year has hurt the bottom line of just about every company in the universe. Where have you been?

          I think you'll still be making your same asinine comments some 10 years in the future about Microsoft.
          adornoe
      • Netbooks are a rank excuse and not the problem

        The problem is Steve Ballmer and his lack of margin-making leadership
        in the Netbook space.

        He should be fired and I assume he will be.

        http://www.youtube.com/watch?v=wvsboPUjrGc
        mlindl
  • A bit worse than I thought it would be...

    ...but not too surprising. MS were always going to get hit hard in the recession.
    Sleeper Service
  • Over-reaction here, please calm down...

    If you look inside the numbers, you will see tremendous top side from Windows7 and Windows Server 2008 R2. I have access to top-secret numbers as a Microsoft platinum customer and believe me, these numbers paint a different story. With these numbers, it is clear that the "Lauren" ads have skewed consumer business to Microsoft and destroyed Apple. Anyone who looks at shares of AAPL vs. MSFT will realize that only a loser would be stuck with AAPL.
    Mike Cox
    • You're kidding, right?

      I mean, there was no truth in what you just said. None.
      Blad_Rnr
      • He is a reverse troll

        His job is to make people like you look foolish by trying to argue with him. He is an Apple $hill who hates MS. Why he wants to make people like you look foolish, the very people who agree with his [b]real[/b] point of view, is beyond me.
        NonZealot
        • Actually, he's a...

          ...humorist. And pretty good at it, too.
          gfeier
          • Shouldn't a humorist be funny?

            And shouldn't they change their schtick every once in a while? After you've seen the same template used a thousand times, it loses any edge it may have had.

            Oh, well, enjoy him as you will. What I find humorous is that he is making those who agree with his true beliefs look like total fools.
            NonZealot
          • Maybe he'll change his schtick when you change yours!

            people who live in glass houses, after all.

            you do live in a house, don't you?
            mlindl
          • But he still reals them in.

            And Mike C. is hilarious. He makes the OMers of the world cringe
            because that is how many actually think.
            Bruizer
        • He has come out of character a few times

          And those few times that he has, I cannot recall a positive word about Apple.
          Michael Kelly
  • RE: Microsoft's client revenue skids; Blame netbooks, Windows 7 deferrals

    Its just a temporary set back and Microsoft will correct this when Windows 7 is released. No need to panic.
    Loverock Davidson