Microsoft's tough quarter means enterprises gained negotiating power

Microsoft posts drops in revenue, profit but outperforms analysts' targets

Microsoft (NASDAQ:MSFT) on Friday posted $3.57 billion in net income (or 40 cents a share) on $12.92 billion in revenue for its Q1 FY2010. This was a 14% decline and an 18% decline, respectively, over the same quarter a year ago. But it was better than analysts expected. The company cut expenses to help it deal with its slowdown in revenue.

Analysts were expecting an average earnings per share of 32 cents and $12.37 billion in revenue. This compares to 48 cents per share and $15.06 billion in revenue for the year-ago period.

As I mentioned yesterday in my post A scary Q1 for Microsoft could lie behind the Windows 7 hoopla, there are some underlying trends that don't allow Microsoft to lay its slowdown solely at the feet of a tough economy. For instance, PC sales have improved during the quarter with Apple earlier this month posting its most profitable quarter in history.

That said, the release of Windows 7 bodes well for Microsoft's lagging desktop business. Day 1 sales yesterday were a phenomemon. Enterprises, most of which have never upgraded to Vista, are ripe for the plucking for Windows 7 upgrades. But, if you haven't negotiated with Microsoft for desktop licenses since XP, know this: the numbers show that enterprises and consumers are not paying as much for Windows as they once did, even a year ago. OEMs are buying more licenses for low-cost netbooks and enterprises are buying fewer licenses for premium Wiindows editions, according to documents that Microsoft filed with the SEC.

Some of the numbers in this quarterly report suggest that Microsoft needs to better please its enterprise customer. Enterprises remain even keeled with Microsoft server products. The company posted roughly the same year-over-year revenue for its Server and Tools division, which sells Windows Server, Microsoft SQL Server, and other server products. Its increased profit thanks to cost cutting from layoffs and reduced marketing. That's the good news.

But its Business Division, responsible for Office 2007, saw a decline in revenues mostly as result of fewer 2007 Microsoft Office system licenses. With all the hype around Office 2010, enterprises may be stalling their upgrades until the next Office arrives -- or they may be using the new version as a time to rethink their choice of Office software (Google Apps anyone?), and negotiate for better prices when they do stick with Microsoft.

Microsoft also lost a pretty penny on its Online Services Division, responsible for Bing. It posted a $480 million loss on $490 million in revenue for the quarter. This was less revenue and a bigger loss than its year-ago last quarter. For all the hype, Bing is not yet going in the right direction. What IT executives need to understand is that while Microsoft devotes so much attention and investment in Bing, it is enterprise licenses that are helping to pay for it.

Segment revenue and operating income (loss) were as follows during the periods presented:     
(In millions)    
Three Months Ended September 30,    2009   2008
Windows & Windows Live Division  $     3,981  $     4,116
Server and Tools  $     3,437  $     3,438
Online Services Division  $       490  $       510
Microsoft Business Division  $     4,406  $     4,918
Entertainment and Devices Division  $     1,891  $     1,893
Unallocated and other  $    (1,285)  $       186
Consolidated    $12,920     $15,061 
Operating income (loss)    
Windows & Windows Live Division  $     2,811  $     2,869
Server and Tools  $     1,244  $     1,010
Online Services Division  $      (490)  $      (332)
Microsoft Business Division  $     2,840  $     3,112
Entertainment and Devices Division  $       294  $       134
Reconciling amounts  $    (2,217)  $      (794)
Consolidated  $     4,482  $     5,999

Source: Microsoft

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