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Microsoft Profit Falls for First Time in 23 Years:profit drops 32%, revenues down 6%

By Amarendra Bhushan for CEOWORLD Magazine Updated:April 24, 2009

The world’s largest software company, Microsoft Corp. posted its results for the third quarter ending March 31, revealing revenue of $13.65bn (£9.31bn), a 6% decline on the same period in 2008.

Microsoft said the company’s performance had been affected by the performance of its PC software division which fell by 16% as fewer PC’s pre-loaded with its operating system were sold.

For the first time in Microsoft’s 23-year history as a public company, revenue fell year-over-year as PC shipments tumbled. Earnings sank 32 percent.

Revenue from its internet division has fallen again this time dropping by 14%. Despite investment in search marketing it has struggled to trouble the likes of Google and Yahoo!.

Last week, Intel Corp. CEO Paul Otellini raised some hopes when he said the PC market had bottomed out in the first quarter. And on Thursday, EMC Corp. CEO Joe Tucci predicted that spending on information technology “has reached or is very near the bottom” and should rebound in the second half of this year. He made those comments even as EMC reported that first-quarter profit dropped 23 per cent and the company planned more cost cuts.

“I didn’t see any improvement at the end of the quarter that gives me encouragement that we are at a bottom and coming out of it,” Christopher P. Liddell, Microsoft’s chief financial officer, said during a conference call to discuss the company’s results. “They stopped getting worse, but that’s different from they started getting better.”

Earnings per share were $0,33, down by 30% over last year and below the analyst forecast of $0,39 per share. Excluding a charge related to severance payments for layoffs and another for impairments to investments, the earnings would have met analyst expectations, Microsoft says.

Microsoft’s Online Services Business, which includes its struggling search operations, posted an operating loss of $575m. Its Entertainment and Devices division, which includes the successful Xbox business, as well as Windows Mobile and the Zune, reported an operating loss of $31m.

Microsoft Corp. today announced revenue of $13.65 billion for the third quarter ended March 31, 2009, a 6% decline from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $4.44 billion, $2.98 billion and $0.33 per share, which represented an increase of 3% and declines of 32% and 30%, respectively, when compared with the prior year period.

I’ll explain what I mean by the life cycle of relevancy, but first let me lay out a few data points:

* Microsoft’s performance would have been catastrophic were it not for annuity income from its Servers and Tools division — licensing revenue that came up for renewal during the past quarter. And while those renewals were stable, customers weren’t adding products as they usually do, nor were they adding seats; indeed, because of layoffs, many of them were in fact reducing seats.

* Revenue in the Client division, which includes Windows and Office, fell by 19 percent. Half — half!! — of Microsoft’s operating income comes from sales of its Windows operating system. The preponderance of its remaining product portfolio, from Office to SharePoint, is built on top of that.

* Liddell said sales of premium products fell by 16 percent. Gulp.

* Microsoft’s fourth fiscal quarter, ending June 30, is the really big one for annuity renewals. If Liddell hasn’t seen any improvement in business conditions — and he says he hasn’t — that bodes really badly for Microsoft’s annuity business and thus the company overall.

If Microsoft has to count on its Servers and Tools division to carry the company, it is truly in trouble, because that is where it faces the most competition from the likes of IBM, HP – and Oracle, once it finishes digesting Sun, Michael Hickins wrote.

The financial results for the third quarter ended March 31, 2009, included $290 million of severance charges related to the previously announced plan to reduce up to 5,000 positions and $420 million of impairments to investments. Combined, these two charges reduced earnings per share by $0.06.

Revenue in Client, Microsoft Business Division, and Server & Tools was negatively impacted by weakness in the global PC and Server markets. Revenue from enterprise customers remained stable during the quarter.

“With our continued R&D investment and our broad suite of products and services, we remain in a great position to compete and gain share in the marketplace,” said Kevin Turner, chief operating officer at Microsoft. During the quarter, Microsoft released the beta version of the Windows 7 operating system, which remains on track for a fiscal year 2010 launch. Development milestones were achieved on other products including Microsoft Office 2010, Windows Server 2008 R2 and Windows Mobile.

Microsoft makes most of its profit selling the Windows operating system and business software such as Office, and those divisions have been hammered over the last six months as consumers and businesses sharply cut their technology spending. The holiday quarter, which ended in December, was the PC industry’s worst in six years, according to research groups IDC and Gartner Inc. In the following quarter, computer shipments sank about 7 percent.

The company is exposed to the weaknesses in the economy in general, and soft demand for PCs and servers in particular. Revenues in its Client business (Windows) was down 15.6 percent to $3.40 billion. It’s servers and tools business proved the the healthiest with a 7 percent increase in revenues to $3.47 billion, marking the first time I believe that servers and tools brought in more revenues than the client business. The online business saw revenues decline 14.5 percent to $721 million, and its loss doubled to $575 million, Erick Schonfeld wrote.

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CEOWORLD Magazine

This is definitely something I need to see in action first.

Until they figure out a way to get rid of the lag between performing an action and the response on product these things will be nothing more than novelty.

Given his spectacular run of disasters (PlaysForSure, Zune, LiveSearch, WinMo, Xbox, SPoT, Encarta, and (ta-da - "The Wow Is Now!!!) Vista(ster), it is long past time for him to be "...managing personal assets and spending more time with his family."

I think Ballmer should go now?