Another painful quarter: are Microsoft's cash-cow days over?

Plenty of blame to go around for Microsoft's 29% dive in profits

As expected, Microsoft has posted one of the most painful quarters in the company's history and its year-end results were also bleak. The company reported revenue of $13.10 billion for the fourth quarter ended June 30, 2009, a 17% decline from the year-ago period. Operating income, net income and diluted earnings per share for the quarter were $3.99 billion, $3.05 billion and 34 cents per share, which represented declines of 30%, 29% and 26%, compared with the prior year period.

The company missed analysts expectations too. Microsoft was expected to post fourth-quarter earnings of 36 cents a share on $14.37 billion in revenue, according to data compiled by Thomson Reuters. For the fiscal year ended June 30, 2009, Microsoft reported revenue of $58.44 billion, a 3% decline from the prior year. Operating income, net income and diluted earnings per share for the year were $20.36 billion, $14.57 billion and $1.62, which represented declines of 9%, 18% and 13% respectively.

There was plenty of blame to go around. Microsoft executives pointed fingers at the poor economy and at low PC sales. Revenue from Windows operating systems declined, and was also impacted by the way that Microsoft is accounting for that revenue. Whenever a license for Vista is purchased with an option to upgrade to Windows 7, Microsoft is attributing half of that revenue to Vista and holding onto half to attribute to Windows 7. But Microsoft was forced to admit that OEMs are paying less for the OS thanks to the growing popularity of netbooks running cheaper XP.

Although Microsoft chalked up an increase in volume licenses, some of that was due to recognizing deferred revenue and not new deals, the company said. Sales for the products most favored by the enterprise didn't boom in the quarter, either, including Office. The story is different for the year. Enterprises are buying Microsoft servers at a decent rate, with SQL Server and System Center doing especially well, the company said. The Server and Tools division sold $14.13 billion worth of product for the year, compared to $13.10 billion in 2008.

With the rollout of Bing, Microsoft is losing more money than ever on its always-a-drag on profits Online Services Business. Revenue declined 13% in the fourth-quarter from the year-ago period and dipped 4% for the year over 2008. The company lost $732 million, which is a 51% bigger loss than the quarter before -- and when the whole year is tallied up, Microsoft lost $1.22 billion, an 84% bigger loss than 2008.

It also lost money ($130 million) this quarter on its Entertainment division, which includes Xbox. And while it finished the year with a profit on Xbox, (it made $169 million) that compares to the 2008 year-end profit of $497 million. Not going in the right direction, especially for a business unit that took billions in R&D to create and has spent most of its life in the red. (Has anyone suggested to Redmond that they sell the division already?)

The infamous hoard of cash that Microsoft is sitting on is also being whittled away ... $6 billion compared to $10 billion a year ago. However it;s hard to fault the company on this as it has also doubled its short-term investments, making that cash work a little harder than in previous years.

Ok ... so what's the upside? I'd like to tell you that now that Microsoft is under pressure from every quarter, that negotiating a more favorable contract should be easy to do, but from the reports of 'softies and users I've talked to, not so. Instead the company is putting pressure on its sales team to wring more money out of its enterprise customers to buy more and pay higher prices, too. The company isn't hurting quite enough to see the light on its draconian pricing policies unless you are twirling a Red Hat CD in your hand while negotiating.

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