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April 23, 2009

Microsoft takes the expected profit and revenue hit in fiscal 3Q09

Posted by David Hunter at 8:44 PM ET.

Microsoft announced fiscal 3Q09 result after the market close today and while it was a sorry story, but it was pretty much what Wall Street analysts had expected:

Excluding one-time items, the software giant reported a profit of 39 cents a share in its fiscal third quarter, on a topline of $13.65 billion.

In the same period last year, Microsoft turned in a profit of 47 cents a share on revenue of $14.454 billion.

The company was seen reporting a profit of 39 cents a share on sales of $14.094 billion, according to a Thomson Reuters consensus estimate of analysts who follow the company.

You’ll notice that while the profit met the Wall Street estimate, the revenue was rather lighter and moreover the first year-over-year revenue drop in Microsoft’s history.

Always more interesting to me are the year over year quarterly numbers for Microsoft’s various business segments (per Microsoft’s 10-Q statement):


Profit was down 19% on revenue that was down 16%. The problem as expected was decreased unit sales exacerbated by the switch to cheaper and lower profit Windows operating system versions driven by the rise of the netbook PCs:

Client revenue decreased primarily as a result of PC market weakness, especially PCs sold to businesses, and a continued shift to netbook PCs. OEM revenue decreased $637 million or 19%, while OEM license units decreased 6%. The decline in OEM revenue reflects a 14 percentage point decrease in the OEM premium mix to 62%, primarily driven by growth of licenses related to sales of netbook PCs, a decline in premium editions sold to business customers, and changes in geographic mix. …

Client operating income decreased primarily reflecting decreased revenue and increased research and development expenses, partially offset by decreased sales and marketing expenses.

Business Division (mainly Office)

Business Division income was down 8% on revenue that was down 5% as consumer sales dropped while business sales managed to eke out modest growth based on deferred revenue from previously signed volume licensing agreements. Also, Microsoft’s April 2008 acquisition of Fast Search & Transfer ASA (“FAST”) once again hit the bottom line as it added 16% to cost of revenue.

Server and Tools

I think it would take a comet hitting the Earth to stop Microsoft’s Server and Tools group which had a 24% increase in profit on a 7% increase in revenue.

This [revenue] growth reflects recognition of deferred revenue from previously signed agreements and continued adoption of Windows Platform applications through SQL Server 2008, which was released in the first quarter of fiscal year 2009, CAL Suites, and System Center products.

CAL Suites are bundles of Client Access Licenses for multiple Microsoft Server products.

Online Services Business

Online revenue was down 14% and the loss doubled year over year to $575 million due to a 16% drop in advertising sales, a 28% decrease in the legacy ISP revenue, and a 48% increase in cost of revenue "primarily driven by increased traffic acquisition costs and data center and equipment costs."

Entertainment and Devices Division

EDD went slightly into the red on a 2% drop in revenue:

EDD revenue decreased primarily due to decreased sales of application software for Apple’s Macintosh computers, partially offset by increased Xbox 360 platform and PC game revenue.

As I’ve mentioned previously, I’d be more enthusiastic about the Xbox if Office for the Mac weren’t carrying the division.

Bottom Line:

The big question posed by these results is whether Microsoft’s Client and Office cash cows are just under the weather due to the economy or whether the rise of netbooks has caused a much more serious illness.

Filed under Acquisitions, Financial, General Business, Microsoft

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One Response to “Microsoft takes the expected profit and revenue hit in fiscal 3Q09”

  1. Google goes for Microsoft’s wallet with free Google Chrome Operating System | Microsoft News Tracker Says:

    [...] Assuming that Google’s vision of a Web operating system and applications appeals to budget netbook buyers as much as shaving the Windows XP license fee, it will definitely impact Microsoft’s Client operating system business which has already been hit by netbooks running th…. [...]

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