Microsoft Q2 2009 by the Numbers
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News Analysis. Hard times have hit Microsoft hard. The company missed fiscal second-quarter projections and refused to offer forward-looking guidance. |
Microsoft had planned to announce earnings results after market close today, Jan. 22, with an analyst conference call at 5:30 p.m. Instead, Microsoft unexpectedly made the announcement at 9 a.m., followed by an 11 a.m. conference call. Related: Microsoft announced the long-rumored layoffs—1,400 people immediately.
For Microsoft's 2009 fiscal second quarter, ended Dec. 31, revenue was $16.63 billion, for a 2 percent year-over-year increase. Operating income was $5.94 billion and net income was $4.17 billion, or 47 cents a share. Operating income declined 8 percent, net income by 11 percent and earnings per share by 6 percent year over year.
The quarterly miss reminds me of fourth-quarter 2000—at the start of the last recession—for which Microsoft issued a profit warning. But during today's conference call, Microsoft CEO Steve Ballmer insisted that this is no normal recession. He described an "economic dislocation" that would be long-lasting and market-changing.
In October, Microsoft gave guidance for its fiscal second-quarter revenue of between $17.3 billion and $17.8 billion, operating income between $6.1 billion and $6.4 billion, and 51 to 53 cents earnings per share. So, by every measure, Microsoft missed its numbers.
When Microsoft offered guidance, sales were sluggish and remained so into November. But they stalled in December, when Microsoft saw a dramatic change. "The economy has clearly deteriorated more than we expected," Microsoft Chief Financial Officer Chris Liddell told financial analysts during today's conference call.
Still, troubling signs already were apparent in October. As I observed then: "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."
This is the place where I typically recount Microsoft's forward guidance. But there is none. Because of economic uncertainty, Microsoft refused to offer revenue or earnings projections for the second half of fiscal 2009. Three months ago, Microsoft reduced fiscal 2009 projections: 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 and $2.10.
Microsoft's unstated future and muted present contrast strongly with the situation for Apple, which Jan. 21 announced record revenue—over $10 billion—for the same quarter as Microsoft. Apple offered guidance for the first calendar quarter.
Segment Results:
Because of today's unusual earnings circumstances, I am splitting up the past, present and future. Earlier posts looked at the present, this one looks at the past and the next one will address the future. Microsoft has five business divisions, the results for which vary. Some were more affected by the recession than others.
Client. Windows PC sales were a hot topic of discussion and even disagreement among financial analysts ahead of today's earnings announcement. The week of Jan. 12, IDC said worldwide PC shipments dipped slightly in the fourth quarter from the same period in 2007. Gartner reported 1.1 percent growth. The most disturbing sign of trouble: a 2.5 percent third-to-fourth-quarter sequential decline, according to IDC. The fourth quarter is typically the strongest for PC shipments because of holiday sales.
Microsoft had forecast worldwide PC growth between 10 and 12 percent for the quarter. Instead, Chris told financial analysts this morning that shipments were flat. This fall-off contributed to an 8 percent decline in revenue for the Client division. Operating income dropped more: 13 percent.
Revenue declines weren't just about slowing PC shipments. Microsoft also took a hit from increased sales of consumer Windows versions, which was spurred in part by increasing mininotebook, or netbook, sales. The company makes less on Windows XP Home than it does on "premium" Vista editions. XP Home is the most common Windows version shipping on mininotebooks.
According to IDC, manufacturers shipped about 5 million mininotebooks during the fourth calendar quarter. Microsoft says its mininotebook installation rate is about 80 percent. That works out then to about 8 percent of the total Windows licenses, 50 million, shipped during the quarter.
OEM revenue decreased 12 percent year over year, or $465 million, while units dropped just 1 percent. The shift in premium mix (down to about 64 percent of units) largely explains the 11-point disparity. Additionally, OEMs anticipating slower holiday sales stocked less inventory. Hence, they bought fewer Windows licenses.
I predict that mininotebooks will remain a combined high and low point for Microsoft until the release of Windows 7. The high: increasing sales of the desirable, low-cost portables. The low: lower revenue, profits and margins for every Windows license sold.
Commercial and retail licensing sales increased 19 percent year over year, or $113 million. Microsoft largely attributed gains to annuity licensing. About 81 percent of Client revenue comes from OEM license sales.
Something else noteworthy: Microsoft Client revenue and operating income—respectively, $4.2 billion and $3.67 billion in the third quarter—steeply declined sequentially. Holiday sales more typically lift revenue and profits (see charts to make comparisons).
Server and Tools. About two-thirds of this division's revenue comes from annuity licensing, which greatly insulates the results from macroeconomic rolls. The division posted double-digit year-over-year growth for revenue and operating income. CAL (client-access license) revenue grew 15 percent year over year, or $378 million. According to Microsoft's quarterly 10-Q filing:
This growth reflects recognition of deferred revenue from previously signed agreements and adoption of the Windows Platform and applications with the releases of Windows Server 2008 during the second half of fiscal year 2008 and the release of SQL Server 2008 during the first quarter of fiscal year 2009. Consulting and Premier and Professional product support services revenue increased $104 million or 16 percent, primarily due to revenue from annuity support agreements.
While analysts are forecasting declines in server hardware sales, Microsoft server license sales grew faster than the market. That shows the strength of Microsoft's annuity and CAL licensing models, allowing a push past larger macroeconomic conditions. My prediction: Many businesses will deploy new server software on existing hardware. Can you say virtualization?
Business. This division took a surprising hit during the quarter. About 55 percent of revenue comes from annuity licensing, which is a strong insulator against larger macroeconomic fluctuations. Revenue rose 1 percent year over year, but income fell. More importantly, both revenue and income declined sequentially from $4.95 billion and $3.3 billion, respectively (see charts to make comparisons). So even with the annuity licensing cushion, Business suffered.
Problems came mostly outside of the 55 percent. "Consumer revenue decreased $224 million or 23 percent, primarily as a result of decreased licensing of the 2007 Microsoft Office system through our OEM channel," according to Microsoft's 10-Q. That difference would have meant year-over-year revenue growth and flat sequential sales. Office accounts for about 90 percent of Business revenue. Microsoft can chalk up most weakness to declines in consumer PC sales.
Online Services. Microsoft's little division that could still can't. But it's trying and losing money in the process. The division posted advertising revenue of $664 million, up 7 percent, or $43 million. Microsoft is making most of the money from display advertising. Forget about search.
Entertainment and Devices. Those Xbox sales lift revenue, but they sure don't help profits. The division's revenue grew 3 percent year over year to about $3.2 billion, posting operating income of just $175 million. Microsoft sold 6 million Xbox consoles in its fiscal second quarter compared with 4.3 million a year earlier. I'm sure those $200 no-frills units helped. Microsoft doubled Xbox console sales in Europe and ended the quarter with 17 million Xbox Live subscribers.
Uh-oh, Zune moved closer to getting chopped off along with some Microsoft employees. Platform sales dropped 54 percent, or $100 million, largely because of lower device sales. For perspective: Microsoft cut Zune prices before the holidays; Jan. 21, Apple reported record iPod sales—more than 22 million units for the quarter. Hell's bells, am I alone in liking the Zune?
[Please send your tips or rumors to watchtips at live.com]
Related Posts:
- Microsoft Knuckles Down for Hard Times, Microsoft Watch, Jan. 22, 2009
- Steve Ballmer's Memo on Microsoft Layoffs, Microsoft Watch, Jan. 22, 2009
- Quick Take: Microsoft Earnings, Layoffs, Microsoft Watch, Jan. 22, 2009
- What 2008 PC Sales Mean to 2009, Microsoft Watch, Jan. 15, 2009
- How Much Microsoft Tax Do You Pay?, Microsoft Watch, Jan. 12, 2009
- Can Microsoft Sell Value in Tough Times?, Microsoft Watch, Jan. 12, 2009
- When Mini Speaks Layoffs, I Believe, Microsoft Watch, Dec. 22, 2008
- Vista: Now Microsoft Can Blame the Economy, Microsoft Watch, Dec. 10, 2008
- What Happens If Microsoft Warns?, Microsoft Watch, Dec. 8, 2008
Comments (19)
I think you are alone liking the zune. I bought my wife an iPOD touch for Christmas from Best Buy (which she loves). I had to get a clerk to unlock the cabinet, and he had to carry it to the cashier, I couldn't handle it until I paid for it. There was a big line of people getting this done for them. All the zunes were just in a big pile, you could just take them and put them in your shopping cart. I guess the lesson here is that people won't even steal zunes, let alone buy them.
Posted by smist08 | January 22, 2009 5:10 PM
Dislocation? How about dislocating one Steve Ballmer, and the horse he rode in on. Here is my 4-step plan to "fix" Microsoft:
1) Eliminate Gaming & entertainment devices
2) Eliminate Dynamics (or whatever it's called now)
3) Eliminate MSN and the feud with Google
4) Fire Ballmer, Bach, & Ozzie
The company would be profitable immediately and the money saved by killing these loser product lines could be used for real R&D.
Posted by Greg | January 22, 2009 5:16 PM
In other news Google and Apple had great quarters. So with the right leadership, its obviously possible to do well even in a recession; bad news for Balmer.
The other news story I see is Microsoft re-introducing DRM for its mobile music store. That should boost WM. I suspect they aren't getting it.
Posted by smist08 | January 22, 2009 5:33 PM
"Consumer revenue decreased $224 million or 23 percent, primarily as a result of decreased licensing of the 2007 Microsoft Office system through our OEM channel," according to Microsoft's 10-Q.
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Maybe users are not seeing the value or need to buy more lockinware, Office 2007. There are better free alternatives, OpenOffice for example, that even runs on Windows and well as Linux.
www.openoffice.org/
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Joe says:
"I predict that mini-notebooks will remain a combined high/low point for Microsoft until Windows 7 releases. The high: Increasing sales of the desirable, low-cost portables. The low: Lower revenue, profits and margins for every Windows license sold."
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Now even if Microsoft gets Windows 7 to run acceptably on "most" Netbooks, do not look for them to be able to sell this at the higher price. Netbooks are about cost, first. So Netbooks will continue to drag down the profit margin of MS in the future. Simple reason, if Seven costs too much on a Netbook, folks will buy the Linux one.
Look at Apple, its still doing great, increasing market share against Windows at the same time MS is laying off people. Linux on the desktop, increases market share by 3x to 4x since the advent of Vista.
You have to ask yourself, what is fundamentally wrong with Windows, that users are switching? I say its the abysmal security in Windows, and its not going be fixed in Seven.
Also, Seven is just Vista with a few bug fixes, and tweaks. Most people will figure that out, and it will have about the same market as Vista before it. Which is fair, because Seven is the "better Vista," those are the words of the sweaty guy, Ballmer. It still remains to be seen if Seven will be better than Vista. Seven will not have the drivers to replace most of the old XP computers already out there.
Windows worm trickery for Vista
http://news.bbc.co.uk/2/hi/technology/7842013.stm
Quote: "The Ministry of Defence has been battling an outbreak of the virus across its network for more than two weeks, and on Tuesday a network of hospitals across Sheffield told technology website The Register that more than 800 of their computers had been infected."
Posted by chips b malroy | January 22, 2009 5:38 PM
“I predict that mini-notebooks will remain a combined high/low point for Microsoft until Windows 7 releases. The high: Increasing sales of the desirable, low-cost portables. The low: Lower revenue, profits and margins for every Windows license sold.”
So how do you think things will change once Windows 7 ships? If that’s going to replace XP on netbooks, then Microsoft won’t be able to charge more for it than they currently charge for XP. So, from a revenue and profit viewpoint, what exactly will be different?
Posted by Lawrence D'Oliveiro | January 22, 2009 6:10 PM
Joe;'Hard times have hit Microsoft hard.'
and apparently this will be continuing.
Calls for open source government
news.bbc.co.uk/2/hi/technology/7841486.stm
The secret to a more secure and cost effective government is through open source technologies and products.
The claim comes from one of Silicon Valley's most respected business leaders Scott McNealy, a co-founder of Sun Microsystems.
He revealed he has been asked to prepare a paper on the subject for the new administration (Obama).
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Windows XP, Windows Vista, and Windows 7 show their multiprocessing mettle in our dual-core and quad-core performance tests
http://www.infoworld.com/article/09/01/22/03TC-windows-multicore_2.html
"Regardless of how you slice the numbers, Windows 7 and Vista remain birds of a feather and clearly a very different species of animal from Windows XP. You can see this divergence in the overall execution path complexity for Windows 7. Like Vista, this new Windows chews up a lot more CPU cycles per transaction loop than XP -- from 39 to 68 percent more on dual-core and from 19 to 51 percent more on quad-core (the lower figures in each case representing the workflow workload, and the higher figures the database workload). Any illusions about Windows 7 somehow being leaner or more efficient than Vista can now be thrown out the window, right along with the infamous "new kernel" myth and related rumors and misconceptions".
I said that; Windows reached its Best with XP, there is no motive to migrate to windows Seven
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Posted by Marco | January 22, 2009 6:21 PM
@Greg:
I found your suggestions interesting, although I dont agree with:
1) Eliminate Gaming & entertainment devices
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Sure the 360 has had "unfortunate hardware issues" but that Xbox Live Arcade (IMO) is a massive cash cow for Microsoft (IMO). Without the console they couldnt pimp it, so whilst Zune may be the item no-one wants to associate with IMO (and it appears to me even Microsoft, since you'll be hard pushed to find the name Microsoft on the Zune website front page)
If you look carefully you will see Microsoft in text at the bottom in a small font.
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Greg, nice reading your post, although I dont think "Eliminate MSN and the feud with Google" could ever happen, since imo Microsoft couldnt bare to admit defeat to anyone.
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Microsoft can afford to play the waiting game, and they will (IMO) until they can either destroy its market with a combinate of smaller search engine purchases or swallow it up with a purchase itself. Either way (IMO) the search war is a long term campaign for MS.
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I think a good start for MS would be to release products that dont encounter the problems we read about on most IT forums.
Posted by Goblin | January 22, 2009 6:28 PM
By the way, to those trying to point to US netbook sales to downplay the significance of Linux, it's worth noting that the US accounts for less than 10% of world netbook sales, with the lion's share going to EMEA.
http://blogs.zdnet.com/ITFacts/?p=15390
Posted by Lawrence D'Oliveiro | January 22, 2009 7:25 PM
"Xbox Live Arcade (IMO) is a massive cash cow for Microsoft (IMO)."
Even if you ignore all the development costs, and assume that all of E&D is only XBox, then it only makes 2% of their total revenue. E&D includes hardware, Mac Business software, PC games as well as XBox. XBox makes most of its money from Game licensing and hardware sales. Live Arcade must be a tiny percentage of their revenue. I recon about $200-300 million per year, that's an optimistic guess. Microsoft probably spend more on office stationary.
Posted by billybob | January 23, 2009 10:59 AM
billybob, whilst i cant challenge the figures, when you consider that 360 has a reasonable user base, of which many are just coming into the possition of using live. add to that theonly way they can play online is through live, they have no choice.
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It would be interesting to see the figures of xbox users in total compared to those who are on live.
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Thanks for the info billybob I didnt know that the live revenue accounted for so little of ms profit. I had always assumed live was a great sucess for ms. obviously i was wrong.
Posted by goblin | January 23, 2009 1:46 PM
AFAIK about 50% of XBox owners subscribe to Live. Personally I don't like to be in a situation where I am forced to pay for something that everyone else gets for free. Even PC gamers get free online play for most games.
XBox combined with Ballmers crazy share buy-backs are the reason that they now have less money in the bank than Apple.
My figures were revenue, not profit. I think in terms of profit it is even smaller. Windows and Office are very profitable and any normal product would be doing very very well to get those sorts of margins. Windows and Office are special products because they have a monopoly, that's why they are cash cows.
Posted by billybob | January 23, 2009 2:11 PM
completly agree billybob, and as i said on a previous post, the live arcade scheme was, imo what a microsoft dominated life would look like. I have to be honest i had a good 360 experience with no hardware issues, but to play online for a price? and to develop and deploy your own software for the 360 charged aswell? im pleased that our xbox was replaced on the kids request by a WII.
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I wish i had the link handy, but i recently did an article on a pay per play patent microsoft has apparently applied for. For me there is no doubt how microsoft envisions future life for the enduser.
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Posted by goblin | January 23, 2009 2:23 PM
Microsoft have done well to keep the red ring failures out of the mainstream press.
Recently I had a conversation with a friend that went like this.
Friend: Are those XBoxes a bit rubbish?
Me: Why do you ask?
Friend: My friend has one and it has broken down 3 times and he hasn't had it 1 year yet.
Me: It has 3 red lights flashing in a circle?
Friend: That's it! How did you know?
I think once these things become common knowledge the XBox will not do so well. I know a lot of people who got XBoxes thinking they were the cheap option, but once you add all the required extras and membership it is more expensive than a PS3.
The PS3 will also have a much longer lifespan. I think XBox will have a new version out within 2-3 years to keep the churn going. Microsoft have seen that work for PCs so I expect them to do the same with consoles.
The next big failure is the video chips dying in 360's, the whole console was not designed to last longer than a few years.
http://en.wikipedia.org/wiki/Xbox_360_technical_problems#Video_failure
(So many failures it has its own wiki)
I have seen a couple of PS3 failures, but they were all software not hardware and were fixed with a system backup and restore.
Posted by billybob | January 23, 2009 2:41 PM
Paying for Xbox Live (currently $30 @ Amazon) is worth it. Compared to what the Wii & PS3 has to offer, Xbox live is generations ahead of the competition.
Posted by mailbox | January 23, 2009 2:57 PM
I know that at the start XBox Live had far more features than PS3, but what exactly does Live have now that makes it worth $30 over a very similar system? What makes it generations ahead?
Posted by billybob | January 23, 2009 3:11 PM
I agree billybob, I would be very interested to hear about the generations ahead features and I hope its not going to be one of those posts where a claim is made and then challenged, only to get no response (we get alot of those here)
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To me Mailboxes justification of "what the WII & PS3" offer is irrelevant, since we are talking about Microsoft. I personally think that any extra service ontop of your internet provider is outragous, however it appears the general trend is that it is acceptable. Shame for Microsoft then that the WII has "wiped the floor" with their offering, and if there is to be a mass take up of online console gaming subscriptions, it will be Nintendo who reap the rewards (IMO) and Microsoft trying to play catchup.
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Thats not saying I agree. To be honest I prefered the 360 to the WII, but when you consider that Nintendo have picked themselves up from the lackluster N64 and the subsequent overshadowed GC (IMO), then its quite an achievement that they are in the market at all today, let alone being the bestseller.
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I am a little bit loathed to continue typing about gaming/entertainment however when you look at the fact that in these troubling times the entertainment industry appears to be doing quite well, I think its a market that should be important to Microsoft, since it appears in a broad sense its the only market where the money is at the moment.
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Or am I wrong?
Posted by Goblin | January 23, 2009 5:30 PM
I think the Wii was an interesting toy, but the novelty wore off quickly. It is aimed at a much bigger market than XBox or PS3 so it is natural it would sell more (no 60 year-old woman would buy a XBox).
I think the money is with companies that have a clear business plan and execute it well. Sony is in entertainment but they have lost very badly. eBay did badly yet you would expect them to do well in a recession. Apple did well but you would expect them to do badly.
Posted by billybob | January 23, 2009 7:58 PM
I don’t doubt that many or even most Zune owners are satisfied with what they have. Here’s my thing: Apple dove into the MP3 market when that market was already well on its way to maturity. The iPod quickly made a big splash, and iTunes has played no small part in helping the iPod acuire a 70% market share. Apple did not engage in illegal, monopolistic business practices in order to achieve that level of prominence; nor did Steve Jobs hypnotize buyers in steering them towards the iPhone. And, if you believe that comments on sites such as this one influence consumers, then you need to know that there truly is no Easter Bunny.
When the iPhone was released in October of 2001, it succeeded during a recession caused by the terrorist attacks of 9/11. If the current economic climate adversely affected the Zune and other consumer products, then it stands to reason that it also adversely affected iPod sales during the same time frame. Yet, Apple reported a growth in iPod sales for the most recent quarter, versus a 54% drop in Zune revenues. How much better would the iPod have done in this quarter without the recession?
I believe that Microsoft and its investors need to re-evaluate the Zune with regard to how it affects other products, and how it affects shareholder interests. If I’m a Microsoft competitor — and I don’t believe that Apple and Microsoft compete in the sense that they appeal to very different groups of customers — I truly hope that Microsoft continues to throw money and other resources at the Zune.
Posted by SkateNY | January 26, 2009 1:42 AM
the drastic decline in Zune sales is probably a direct result of the device's freeze-up from New Year's Eve, a month ago
Posted by coffee | February 13, 2009 11:42 AM