Microsoft News Tracker

Last week, Microsoft reported strong, if not blemish-free, financial results for the 1st quarter of fiscal 2009 (ending Sept. 30, 2008) and as expected cut its outlook for the 2nd quarter. The good news was that the outlook was not as dark as Wall Street had expected:

Technology investors are so tired of the drumbeat of bad news that has continued to roil tech stocks that they grasped at the tiniest bit of optimism in Microsoft Corp.’s predictions for its second quarter.

Microsoft said in its fiscal first quarter earnings report that it expects to see second quarter revenues in the range of $17.3 billion to $17.8 billion, while analysts had previously been forecasting revenues of about $17.9 billion. But because its lowered forecast was not as bad as the worse case scenario feared on Wall Street, the stock ended up getting a small boost in after-hours trading.

As for 1Q09 itself, earnings per share were 49 cents beating the analyst consensus of 48 cents.  Still, there were some distinct oddities revealed in the segment results as discussed below with quotes from the 10-Q filing.

Client:

Since the estimated PC shipment growth rate was 10-12%, the big question is where did all the money go? Microsoft merely states:

Client revenue increased reflecting growth in licensing of Windows Vista. Revenue from commercial and retail licensing of Windows operating systems increased $125 million or 22%. OEM revenue decreased $46 million or 1% while OEM license units increased 8%. The decline in OEM revenue reflected the four percentage point decrease in the OEM premium mix to 71% as well as changes in the geographic and product mixes.

I’d conjecture that piracy, Apple, and netbooks (running Windows XP) all played a part, but the bottom line is that Windows revenue grew markedly less than the PC shipment rate which is not good news. Beyond that, income growth was negative due to increased expenses included a 20% increase in R&D expenses that was headcount-related. Not a disaster, but not a pretty picture either.

Business (mostly Office):

Old reliable Office brought home the bacon with the help of $214 million from currency exchange rates. Of note is that, "Consumer revenue increased $288 million or 36%, reflecting increased sales primarily due to promotional pricing programs for the 2007 Microsoft Office system." Expenses increased apparently mostly driven by the troubled acquisition of FAST.

Server and Tools:

Server and Tools continued its winning ways helped out by $119 million growth in revenue from the low margin consulting and Premier and Professional product support services.

Entertainment and Devices (mostly Xbox):

I have to quote extensively for this odd tale:

Xbox 360 platform and PC game revenue decreased $331 million or 22%, primarily as a result of the $330 million of incremental revenue from the launch of Halo 3 in the first quarter of fiscal year 2008 and decreased revenue per Xbox 360 console as a result of price reductions during the past 12 months. We shipped 2.2 million Xbox 360 consoles during the first quarter of fiscal year 2009, compared with 1.8 million Xbox 360 consoles during the first quarter of fiscal year 2008. Other EDD product revenue increased $216 million or 51%, led by increased sales of application software for Apple’s Macintosh computers, the Zune digital music and entertainment platform, and mobile and embedded device platforms.

That has to be Mac Office, which somehow found its way to shoring up the Entertainment and Devices bottom line.

For the remainder of fiscal year 2009, we expect revenue to be flat or to decrease relative to the prior fiscal year due to year-over-year variations in launches, volumes, mix, and prices across our portfolio of products and services. We expect sustained profitability for fiscal year 2009.

Undoubtedly marginal, low growth profitability even adding in Mac Office.

Online Services:

Online advertising revenue grew 15% ($72M) and aQuantive agency revenues nearly doubled to $98M, but cost of revenue increased by $251 million "primarily driven by increased data center and equipment costs and other expenses ate up that and more. The outlook was for more of the same.

Corporate Level Activity (overhead and legal):

No particular item of corporate overhead was called out for the whopping big increase.

Bottom Line: By and large it’s the usual Microsoft story except for the weakness in Client results. Entertainment and Devices continues to underperform Microsoft’s software businesses and the Online Services sinkhole can only be justified as "building for the future."

Chris Morris at Forbes today broke the news that Xbox LIVE Primetime, the centerpiece of Microsoft’s "New Xbox Experience" (NXE) planned for the fall, has had to be delayed.

Microsoft has delayed the launch of "Xbox Live Primetime," its programmed series of interactive games with real-world prizes, until the spring. Microsoft managers say the delay is necessary in order to ensure a smooth launch of the system’s new user interface (or, if you prefer the terminology of Microsoft’s PR department, the "new Xbox experience").
…
The engineering challenges proved formidable–perhaps even more than the company anticipated. Because the relaunch of Xbox Live is the biggest gaming project the company has undertaken since getting the 360 onto store shelves, things have slipped. Rather than postponing the launch until next year, when all touted features will be ready, the company has opted to cut. (Microsoft said recently that it would delay launching the feature that would allow members in different locations to simultaneously watch a streaming Netflix movie together.)

Aaron Greenberg, group marketing manager for Microsoft, said the company is still very dedicated to the concept of Primetime and continues to work on it.

When Primetime was announced in July, I was dubious of the concept and still am without regard to the technical hurdles. It just doesn’t seem attractive either as an interactive game or as a business. Many new technologies start out lamely imitating their predecessors and using Xbox LIVE to imitate a TV game show seems to fit nicely in that category.

This week Microsoft released version 2 of Silverlight, their alternative to Adobe Flash for providing Rich Internet Applications (RIAs). There were various functional enhancements including the promised Silverlight DRM for content protection as well as new cross platform support (see Tim Anderson’s caveat), but I found myself counting the house:

We launched Silverlight just over a year ago, and already one in four consumers worldwide has access to a computer with Silverlight already installed,” said Scott Guthrie, corporate vice president of the .NET Developer Division at Microsoft.
…
Silverlight adoption continues to grow rapidly, with penetration in some countries approaching 50 percent and a growing ecosystem that includes more than 150 partners and tens of thousands of applications. During the 17 days of the 2008 Olympics Games in Beijing, NBCOlympics.com, powered by Silverlight, had more than 50 million unique visitors, resulting in 1.3 billion page views, 70 million video streams and 600 million minutes of video watched, increasing the average time on the site (from 3 minutes to 27 minutes) and Silverlight market penetration in the U.S. by more than 30 percent. Broadcasters in France (France Televisions SA), the Netherlands (NOS), Russia (Sportbox.ru) and Italy (RAI) also chose Silverlight to deliver Olympics coverage online. In addition, leading companies such as CBS College Sports, Blockbuster Inc., Hard Rock Cafe International Inc., Yahoo! Japan, AOL LLC, Toyota Motor Corp., HSN Inc. and Tencent Inc. are building their next-generation experiences using Silverlight.

Microsoft’s goal is to reach the point where the average, unsubsidized Web developer building a rich content site makes the decision for Flash or Silverlight based on other criteria than the ubiquity of the respective browser plug-ins. They clearly haven’t achieved that yet, but it appears that they have made good progress.

At Microsoft’s Windows Vista Blog, Corporate VP Mike Nash reveals that the actual name for the next release of the client Windows operating system which is codenamed "Windows 7" will surprisingly be "Windows 7":

And, as you probably know, since we began development of the next version of the Windows client operating system we have been referring to it by a codename, "Windows 7."  But now is a good time to announce that we’ve decided to officially call the next version of Windows, "Windows 7."

As had been touted previously, Mike also wants to remind us that more Windows 7 details will be revealed at PDC08 and WinHEC08:

In a few weeks we are going to be talking about the details of this release at the PDC and at WinHEC. We will be sharing a pre-beta "developer only release" with attendees of both shows and giving them the first broad in-depth look at what we’ve been up to. I can’t wait for them to see it.