News

Microsoft Weathers Bad Economy in Its First Quarter

• By Kurt Mackie
• October 24, 2008

With securitized bad U.S. housing debts dragging down the world economy, Microsoft's result seemed to be a minor uplift, but not enough. The company still plans belt-tightening measures because of lowered IT spending prospects.

The Windows operating system wasn't the profit center for the quarter, according to Microsoft's 10-Q Form.

"Revenue growth was driven primarily by increased licensing of the 2007 Microsoft Office system and increased revenue associated with Windows Server and SQL Server," the form stated.

Overall operating income increased three percent from quarter to quarter, reaching $5.999 billion vs. $5.849 billion in the previous first quarter. Diluted earnings per share for the first quarter of fiscal-year 2009 were up seven percent, at $0.48 compared with $0.45 in the previous quarter.

Chris Liddell, Microsoft's chief financial officer, said in a Web broadcast on Thursday that "revenue, operating income and earnings per share [were] all meeting or exceeding the high end of our guidance, despite what is obviously a very challenging environment."

Liddell noted a deterioration in spending in the last few months of Microsoft's first quarter and predicted a continued general economic slowdown. In response, Microsoft has adjusted its guidance downward.

In the best-case scenario, company officials are assuming a mild recession and modest growth rate for IT products. At the bottom end, a deeper recession is predicted.

For the second quarter of 2009, Microsoft's stated revenue guidance is $17.3 billion to $17.8 billion. Operating income guidance in 2Q 2009 is $6.1 billion to $6.4 billion. Diluted earnings per share guidance is pegged at the $0.51 to $0.53 range.

Liddell predicted that PC hardware demand in Microsoft's fiscal second quarter would be around 10 percent to 12 percent. However, demand will be higher in emerging markets, growing to the "mid-to-high teens," he said.

Bill Koefeod, General Manager of IR at Microsoft, noted that it is too soon to say whether the "netbook" market was cannibalizing the traditional PC market. Netbooks are typically lower cost portable computers, often running Linux or Windows XP instead of Microsoft's current Vista operating system.

Liddell said that Microsoft was planning to reduce its operating expenses in reaction to the slowing economy. Measures would include lowering Microsoft's head count, marketing costs, capital expenditures and travel costs.

In response to a question from a financial analyst, Liddell clarified that Microsoft "won't have as many people" in the near future but that the job cuts would be "an FY '10 issue." Possibly, his response means that Microsoft will cut jobs in September of 2009.

Microsoft continues to incur costs in its Online Services Business Division -- the only part of its business that racked up operating losses for the quarter. The division had an operating loss of $480 million for the first quarter of fiscal-year 2009. In the prior first quarter, the Online Services Business Division showed an operating loss of $267 million. The division is Microsoft's main force aiming to wrest online advertising share from Google via the Microsoft Live Search product.

Microsoft's CEO Steve Ballmer has said that Microsoft would "be willing to lose between five and ten percent of our total operating income for several years" to catch up with its online search advertising competitors, which include both Google and Yahoo.

Microsoft's Client offerings, which include the Windows operating systems (but not the Windows servers) only showed a two percent revenue increase, quarter over quarter. The Windows sales were partly offset by costs from marketing ($123 million) and research and development ($45 million).

Microsoft's first-quarter financial reports can be accessed here.