Microsoft Q1 2009 by the Numbers

[Editor's note: This was a live document from 4:57 p.m. EDT until 7:05 p.m.]

Microsoft significantly lowered guidance for fiscal 2009 in anticipation of a mild to severe recession. The company already is seeing slowing spending among partners and customers.

That said, for the fiscal 2009 first quarter, Microsoft revenue topped $15.06 billion, for a 9 percent year-over-year increase. Operating income was $6 billion and net income $4.37 billion, or 48 cents per share.

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In July, Microsoft forecast first-quarter revenue in the $14.7 billion to $14.9 billion range, with operating income between $5.9 billion to $6 billion, or 47 cents to 48 cents per share.

During a conference call this afternoon, Microsoft Chief Financial Officer Chris Liddell noted that results came in at the "high end of our guidance."

While Microsoft posted strong year-over-year growth in revenue and earnings, it's the future that worries analysts and investors. Gartner and IDC preliminary third calendar quarter PC shipment data shows signs of slowing consumer PC sales. Businesses carried the quarter.

Fiscal first-quarter results show some trouble ahead. Microsoft's Windows client division revenue increased a muted 2 percent year-over-year growth, while operating income declined by 4 percent.

Microsoft offered forward guidance. For the fiscal 2009 second quarter, Microsoft expects revenue between $17.3 billion and $17.8 billion, operating income between $6.1 billion to $6.4 billion and 51 cents to 53 cents earnings per share.

For fiscal 2009, Microsoft forecasts revenue between $64.9 billion and $66.4 billion, operating income between $24.4 billion and $25.5 billion and earnings per share between $2.00 and $2.10. In July, Microsoft forecast fiscal 2009 revenue between $67.3 billion and $68.1 billion, operating income between $26.3 billion and $26.9 billion and earnings per share between $2.12 and $2.18. Microsoft has significantly reduced guidance ahead of global economic uncertainty.

During today's conference call, Chris said Microsoft saw a "deterioration of spending" toward the end of the quarter. Microsoft's earlier guidance was based on the assumption that the economy would recover during the second half of the fiscal year. This is "unlikely to occur," Chris said.

At the high end, Microsoft's revised guidance assumes a "mild recession," and the low end a "deeper recession," Chris said. His comments starkly contrast those made by Apple executives on Tuesday. Apple CEO Steve Jobs expressed uncertainty but confidence about the economy. Chris is more certain that a recession is here and that IT spending is declining. Maybe the Apple execs should look to Microsoft for guidance for a change.

Microsoft saw spending declines begin in mid-September and continue through mid-October—meaning they're not done. Chris attributed spending declines in part to customers and partners being unable to obtain credit to purchase products.

Nevertheless, Chris expressed confidence about the fiscal second quarter because of holiday sales. His uncertainty is about the second half, which is hard to gauge given volatile economic conditions. Chris is being decidedly cautious, which is prudent. It's better that Microsoft prepares for hard times and so doesn't get whacked unprepared. Microsoft has its network of partners to think about, too.

Microsoft has another problem that weak economic conditions may exacerbate: Netbooks are emerging as an important new PC category. Microsoft doesn't effectively compete there because of Windows Vista system requirements. The company licenses Windows XP Home for the category.

Microsoft license revenue is lower for netbooks, mainly because of Windows XP Home. As netbook demand increases, Microsoft's OEM revenue goes down. Netbooks accounted for about 5 percent of notebook shipments in the third calendar quarter, according to Gartner. But today, Chris said in mature markets, netbooks added about 8 percent PC shipment growth. Whoa! That's a huge number.

Chris cautioned that it's too early to say how much economic conditions will drive further netbook sales. True. I expect the category would have taken off, anyway. My prediction: Weak economy will accelerate netbook sales.

Segment Results
Unearned revenue continued to grow, as Microsoft bookings picked up 6 percent year over year. Microsoft ended the quarter with $13.5 billion in unearned revenue, $13 billion of it unbilled. Unearned revenue gives Microsoft some cushion against the economic slowdown. On average, about 25 percent of Microsoft's quarterly revenue comes from recognized unearned revenue. Some divisions benefit more than others. For example, 40 percent of Server and Tools revenue for fiscal 2009 will come from revenue carried from the previous year's licensing sales.

Microsoft exited the quarter with about $25 billion in cash. When asked about future acquisitions, Chris said, "We will continue to buy," with small-to-medium businesses being the "sweet spot." Microsoft acquired 24 companies during fiscal 2008, and Chris said that the pace could continue. Capital won't be the problem, but integration. Microsoft already is putting cost-cutting measures in place, and acquisitions usually come with integration costs.

Client. The Windows group's quarterly revenue topped $4.9 billion, but operating income declined 4 percent year over year. Microsoft estimated it grew 10 to 12 percent year over year. OEM license growth was 8 percent. Growth in mature markets was flat year over year, buoyed by the aforementioned growth from netbooks.

Microsoft expects worldwide year-over-year PC growth between 8 and 12 percent for fiscal 2009. A quarter earlier, Microsoft predicted 20 percent growth, so the company clearly sees slower PC sales ahead. Microsoft expects single-digit PC growth in mature markets. Growth in emerging markets should be in the mid-teens. Chris warned that, looking ahead, Client revenue will be subject to the "variability" of PC hardware sales.

Commercial and retail licensing grew 22 percent year over year, or $125 million. But OEM licensing declined 1 percent, or $46 million, even as units increased 8 percent. The change comes from increased sales of lower-cost Windows versions in mature and emerging markets. The OEM channel continues to account for about 80 percent of Windows client revenue.

Server and Tools. Server is Microsoft's dream division because of annuity licensing contracts. Revenue for server software, server applications and developer tools increased 17 percent year over year, or $395 million, mainly because of volume-licensing contracts. Unearned revenue from annuity-licensing contracts increased 28 percent. Related: Microsoft consulting services grew 19 percent year over year.

Business. The division had a strong quarter, with revenue up 20 percent and operating income up 23 percent year over year. Back-to-school was good to Microsoft. Office 2007 promotions increased consumer revenue by 36 percent, or $288 million. Business revenue grew 16 percent. Office accounts for about 90 percent of the division's revenue.

Online Services. The division hemorrhaged capital yet again, even as Microsoft claims gains. The division lost $480 million on $770 million revenue. Online advertising revenue grew 15 percent year over year to $72 million. Agency revenue from aQuantive topped ad sales at $98 million.

Even as the ad market slows because of global economic concerns, Microsoft expects ad revenue to grow 13 percent in fiscal 2009. Great. How about reaching profitability some time in this century?

Entertainment and Devices. Strong Xbox 360 console shipments drove revenue, as usual, but was offset by the year-ago quarter when Microsoft launched Halo 2. Revenue for the Xbox and PC game platforms declined 22 percent, or $331 million. During the quarter, Microsoft shipped 2.2 million consoles. Microsoft forecast flat revenue for the remainder of fiscal 2009.

I see that, again, as signs of the slowing global economy. But there's something else at work. Future growth is "impacted by recent Xbox 360 pricing cuts," Chris said.

[Editor's note: Several number corrections were made, and all three charts have been updated.]

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