Microsoft Earnings Flat

Microsoft Corp. reported relatively flat earnings and somewhat lower net income this quarter due, in part, to disappointing results of Windows XP and Vista client operating systems.

Focal Points:

• Microsoft posted $14.45 billion in revenue for the three months ended March 31 and an operating income of $4.41 billion. While revenue numbers were up from the $14.40 billion it achieved the year prior, its operating income fell 33 percent from the $6.59 billion it earned in the same quarter the year prior. The company attributed part of the loss to the $1.42 billion fine it had to pay the European Commission for abusing its competitive position to dominate the desktop. Despite flat revenues, Microsoft altered its fiscal year expectations from approximately $60 billion in projections to between $66.9 billion and $68 billion. As Microsoft tends to be very conservative in its sales projections, this is seen as a strong indicator by the financial community. The company also expects growth to occur next year.
• Some areas of Microsoft's portfolio did perform well this quarter, including its entertainment and devices segment which posted a 74 percent sales increase from the same quarter one year ago. Much of this increase can be attributed to the sales of the Xbox 360 gaming system, although the newest revision of the Zune portable media player also helped to achieve these numbers. Additionally, the company posted an 18 percent increase in its server and tools business, which is includes the latest revisions of popular operating systems and applications such as Windows Server 2008, SQL Server 2008, and Visual Studio 2008. Lower sales of Windows client operating systems contributed to the company's lower than expected performance.
• Microsoft does not break down sales of Windows XP and Vista individually, and claims that some of the shortfall in sales cannot be directly compared with the prior year due to inventory buildups at original equipment manufacturers (OEMs). The company also claimed that piracy also increased in Asia as compared with the year prior. Excluding sales from enterprise agreements, Windows Vista is said to have sold 140 million licensed copies worldwide. Comparatively, Apple Inc. is experiencing growth in sales of both its desktop and notebook lines of Mac computers. That company shipped 2.29 million Macs this quarter, a 51 percent growth from the prior year. Mac sales are also growing at 3.5 times the overall PC market rate of growth as compared to the two to three times rate of growth it has been experiencing each quarter for the last several years. Of particular note is the 61 percent rise in portable Macbook and Macbook Pro notebooks. Apple is even beginning to see increased penetration of the enterprise market in small numbers.

Experton Group believes Microsoft Vista sales are considerably off the expectations the company had for the new operating system, and this has eaten away at its revenue and income capabilities. The company hopes that its new release of Service Pack 1 for Vista will kickstart sales for enterprise customers that have been hesitant to adopt the somewhat unproven and distinctly bloated platform, though that is far from a sure thing. In fact, CEO Steve Ballmer has stated that Microsoft will continue to offer Windows XP if customers demand it, and reports are flying that Dell has even committed to selling XP up until 2012. The recent release of XP Service Pack 3 is helping to keep XP relevant and in the spotlight.

Although Apple can by no means fully account for the shortfall Microsoft is experiencing in Windows client platform sales, the fact nonetheless remains that Macs are getting a lot of attention from consumers and corporations alike. Numerous Experton Group clients have inquired as to how and if they can leverage Mac OSX in their enterprise as employees are increasingly requesting Macs as their chosen client systems. Allowance of Mac OSX remains the exception rather than the rule for most enterprises, save in the few select spaces – design, art, etc. –  where Macs have a committed following and demonstrated leadership capabilities.

 IT executives should encourage Microsoft to improve pricing when adopting Windows Vista as their chosen platform given the company's need for heightened sales, and also expect for Linux and Apple to continue to put pressure on Microsoft's desktop dominance.