Global Monitor: Microsoft feels pinch but poised for recovery

Published on Saturday 25 July 2009 14:25

MICROSOFT, the once-swaggering giant of the personal computer industry, has been humbled, both by the recession and by problems of its own making.

On Thursday, the world's largest software company reported its worst fiscal year since it initially sold stock to the public in 1986. Year-over-year revenue and full-year sales of Microsoft's flagship Windows software dropped for the first time.

"Clearly, Microsoft is not immune to the economic downturn," said Brendan Barnicle, a software analyst with Pacific Crest Securities.

Many prominent companies tied to the PC industry have watched about one-fourth of their revenue vanish as business customers in particular have scaled back new PC purchases. Microsoft makes more money from versions of Windows tied to business computers than it does on cheaper machines aimed at consumers. If businesses start buying again, Microsoft should benefit.

But the economy's pinch is not solely to blame for Microsoft's problems. The company's Windows Vista software, hailed in 2007 as the most significant product in the company's history, has failed to attract businesses in any meaningful way because of problems with compatibility and speed.

Microsoft's Windows profits have also fallen because of rising interest in the cheap, compact laptops known as netbooks, which rely on the lower-priced Windows XP instead of Vista.

Earlier this month, Google revealed plans to sell a direct competitor to Windows for the netbook market, and major PC makers have backed Google in what is most likely a bid to put even more pricing pressure on Microsoft.

In its fourth quarter, Microsoft's net income fell to $3.05 billion (1.95bn) or 34 cents a share, for the period ended June 30. The figures represent a 29 per cent drop in net income from the $4.3bn, or 46 cents a share, that Microsoft reported in the period a year ago. Excluding charges tied to legal matters, layoffs and investments, Microsoft earned 36 cents a share in the quarter, meeting the forecast of analysts surveyed by Thomson Reuters.

Microsoft's 17 per cent drop in quarterly revenue was more troubling to Wall Street, which pushed the company's shares down more than 7 per cent, to $23.70, in after-hours trading. The company took in $13.1bn in the quarter, missing analysts'; estimate of revenue by $1.27bn.

For the full year, Microsoft's revenue declined 3 per cent, to $58.44 billion, while its net income fell 18 per cent, to $14.57 billion. On a positive note, Microsoft echoed recent comments from Intel, saying that there had been an increase in PC sales and healthier spending in Asia and the United States.

"There are some signs that we have at least seen the worst," said Christopher Liddell, the chief financial officer at Microsoft.

In numerous public appearances, Microsoft's chief executive, Steven Ballmer, has warned that people should not expect a major bounce-back in technology spending when the economy recovers. Rather, he suggested that a new, low bar had been set and that companies needed to adjust to such a reality.

Ballmer's most boisterous recent comments have revolved around Microsoft's staying power. He has vowed that the company will keep pouring money into research and development.

Analysts contend that Microsoft has survived the downturn well enough, posting profits at a time when losses were more expected.

Microsoft already appears confident enough to revisit a search and advertising combination with Yahoo.

2009 New York Times News Service