Microsoft says PC, server business still weak

Microsoft on Thursday reported weaker-than-expected quarterly revenue and again declined to offer a forecast for the current quarter.

The software maker reported that for the three months ended June 30, the company earned $3.05 billion, or 34 cents per share, on revenue of $13.1 billion. However, those results included legal and other charges, as well as the deferral of revenue related to a Windows 7 upgrade program. In total, those charges cut into per-share earnings by 4 cents.

Revenue from Windows on desktops and laptops has been dropping. However, the decline isn't quite as deep as it looks, because Microsoft deferred some Windows revenue to future quarters to account for an existing program that gives Vista buyers free Windows 7 upgrades.

(Credit: Microsoft)

Analysts had expected per-share earnings of 36 cents, according to First Call. However the revenue figure was notably weaker than the $14.37 billion that analysts expected, even accounting for the Windows revenue deferral.

"Our business continued to be negatively impacted by weakness in the global PC and server markets," said Chris Liddell, chief financial officer at Microsoft. "In light of that environment, it was an excellent achievement to deliver over $750 million of operational savings compared to the prior year quarter."

Investors were not pleased. In after-hours trading, Microsoft's stock dropped 7 percent, or $1.90, to $23.66.

In a series of PowerPoint slides released along with its report, the company said the enterprise business remained relatively healthy, but hardware sales were weak. PC sales, in particular dropped 5 percent to 7 percent.

On the cost front, it said it reduced expenses by $800 million more than the low-end of its plans. It also recorded $108 million of "impairments" related to a drop in value for some investments.

Although there were some blogs and Twitter posts to the contrary, a Microsoft representative said the company isn't announcing any new job cuts. It did discuss in its earnings report its previously announced program to cut up to 5,000 jobs.

Microsoft didn't give a sales or earnings forecast when it reported its last quarterly numbers in April. It did say it was seeing economic pressures that were both "broad and deep"--the worst in the company's 30-year history.

The results come just as the company wrapped up development of Windows 7, which was officially finalized on Wednesday and is due to go on sale October 22.

Here's a look at the how each business unit did, by the numbers.

[bbabadu]

Time to send in the Bobs to cut that fat.

[JasonCe]

As a shareholder, I am not worried about Microsoft's 4th quarter performance. Microsoft has a LOT of good products in the pipeline, shipping in the next 6 months. <br /> <br />And for those comparing Microsoft to Apple, this is like comparing Mellons to Apples (in size). Apple did well because of high margins (read: EXPENSIVE) in their products but remember that Apple is a consumer company, while Microsoft's bottom line depends largely on enterprise sales. It is expected that enterprise sales pick up later this year, which will help Microsoft sales tremendously. <br /> <br />Among the products in the pipeline are Windows 7, Windows Server 2008 R2, Bing climbing to 30% market share soon with Yahoo deal, Office 2010, Office 2010 Web Apps, Exchange 10, Windows Mobile 6.5 and 7.0 soon after, XBox Natal, Zune HD, ... <br /> <br />Even the worst anti-MS zealots have to agree at this point that Microsoft has become more and more innovative recently, shipping great products with very positive reviews. I am sure the stock will rebound once the dust settles in. It is really a good investment right now.

[The_happy_switcher]

Compare this with Apple's blowout quarter announced Tuesday. Once again Microsoft does what it does best: come up short with stock performance which reflects the fact that that people ate not buying their bloated software and are switching to OS X in <br />droves

[Mark_Anderson]

Or, far more likely, they're waiting for W7's release.

[GajaKannan]

Apple's blowout was due to iPhone sales which overtook even Mac sales and first time drop in iPod sales... I am not defending MS, but you got to check your facts in public posts...

[ballmerisanape]

Mark_Anderson,<br /><br />And yet.. somehow the impending release of Snow Leopard didn't slow Mac sales. Makes sense though if you think about it.. considering how refined the Mac OS is now. Mac users have had the equivalent to 7 for a few years now. <br /><br />If, when 7 is released.... there is a sudden explosion of Windows-based PC sales.. I will gladly eat crow.. But I just don't see that happening. Do you really think there are millions of people waiting to pull the trigger on a new PC purchase? Enough people to make up for the current trend? My guess is that most people will be smart enough to wait until 7 proves itself before they dive in... they learned a valuable after the Vista release.

[Random_Walk]

A lot of that can be attributed to it, but remember:<br /><br />* on the enterprise/SA/EA/Premier side, those are already paid-for (Vista licenses convert to W7 licenses, etc).<br /><br />* on the OEM side, they're already selling computers with free upgrade coupons to W7 (though this has only gone on for roughly a month at most, which is a two-edged sword for them numbers-wise thanks to the deferment they put into place).<br /><br />* This leaves the consumer retail-box side, and maybe the bulk of consumer/SBE OEM purchasing side... and those had better really sell if Microsoft hopes to regain their losses.<br /><br />Not really seeing the Osborne Effect so much, though, where folks would wait first (but then, the Vista upgrade coupon thingy may have burned some folks... dunno).

[monkeyfun14]

@ballmerisanae <br /> <br /> <br />Snow Leopard offers normal users nothing different then Leopard does. <br /> <br />Snow Leopard is not a blow out product its an upgrade or expansion pack to leopard.

[ballmerisanape]

monkeyfun14, <br /><br />What does 7 offer the average user that Vista doesn't.

[monkeyfun14]

http://en.wikipedia.org/wiki/Features_new_to_Windows_7 <br /> <br />Take a look yourself.

[Inconnux]

What does win7 offer that Vista doesn't?<br /><br />hmmm<br /><br />- actual performance.<br /><br />I predict that Windows 7 will help Microsoft a lot because of all the annoyed Vista users who will be dumping Vista in droves. I don't expect it to make a dint in XP usage, but Vista will become a bad memory like ME was. Will this help PC sales? yes.. I know many people who have held off buying a new system because they don't want Vista.

[holyreki]

Just once I'd love to read an article where Apple and/or Microsoft are mentioned without all BS fanboy trolling. Both companies have their strengths and weakness, that's it. It's not like your arguments are going to convert an existing fanboy anyway.

[Mark_Anderson]

@ballmerisanape <br /> <br />Yes but hardly any really cares about Snow Leopard. W7 has a much higher profile.

[CDubber]

Dang, Apple has a record quarter and MS continues to slip. monkeyfun14 will be hitting the bottle tonight...

[setgo]

LOL @ CDubber. Yeah and I just realized that he (monkeyfun) left a "k" off his screen name.

[Random_Walk]

This fits in with a lot of what I'd been typing these past few days. Microsoft can hide behind the economy for awhile longer, but not for too long. Even the deferment of Windows 7 revenues won't really ameliorate the numbers by that much (why? because the coupon/upgrade program hadn't even lasted a month IIRC... so even a blowout income deferred to future certainly doesn't make up for even a quorum of the 22%(!?) YoY drop in revenue.<br /><br />It would be interesting to see how many Windows licenses it actually sold... anyone know if that even comes up in the earnings calls? (and if not, why not?) It would paint a more accurate comparison of how they're doing (which is probably why they don't/won't disclose absolute units sold per quarter). It would only be fair to demand it, though - after all, world+dog demands (and gets) Apple's Mac unit sales (which would account for the majority of OSX unit sales), iPod unit sales, iPhone unit sales, etc.<br /><br />Anyrate, Windows 7 had better be all that and a bag of chips, or else the hard times will only continue...

[bbabadu]

I don't think Liddell's statements suggest "hiding behind the economy" - it is not a hidden fact that in addition to pc sales to consumers, a large chunk of MS's business relies heavily on Enterprise customers. <br /> <br />If companies are laying people off in a declining economy, do you think anyone is spending usual $'s toward IT budgets?? You're going to see the decline in profits and sales, it's not rocket science. <br /> <br />I'd argue that Apple's $ core :) is more Consumer focused, and their sales (iPhones, Macs) clearly reflect this.

[Random_Walk]

"If companies are laying people off in a declining economy, do you think anyone is spending usual $'s toward IT budgets??"<br /><br />On the enterprise side (esp. with EA and SA agreements), contracts are usually set for up to three years at a shot (or more), which means that at a substantial portion of enterprise customers are already paying for their licenses at the same rates, and cannot easily drop the costs. Only those whose agreements are set to renew during that quarter can do what you suggest. Given this, I seriously doubt that even a single-digit percentage of Microsoft's losses could be attributed to tightening corporate budgets. They simply cannot (unless they're renewing) throttle an ongoing contract without incurring a very hefty termination fee in the process.<br /><br />"I'd argue that Apple's $ core :) is more Consumer focused, and their sales (iPhones, Macs) clearly reflect this."<br /><br />I agree perfectly with the premise, btu the conclusion has one problem: The economy certainly hasn't been very kind to the consumer at all.

[bbabadu]

@ Random Walk <br />Point taken re: IT spending. <br /> <br />--I'd argue that Apple's $ core :) is more Consumer focused, and their sales (iPhones, Macs) clearly reflect this.-- <br /> <br />"I agree perfectly with the premise, btu the conclusion has one problem: The economy certainly hasn't been very kind to the consumer at all." <br /> <br />So then, who's buying all the iPhones, zee Germans?

[Random_Walk]

Heh, that's my point - in spite of a crap economy (one that has battered both consumer and business alike), the things are still selling like hotcakes.

[santuccie]

For once, I agree with you. And judging by my own experience from a couple of weeks with the RC, I think it will be.

[santuccie]

Sorry, a lot of comments were added before I posted mine (my fault for not refreshing the page)...<br /><br />'Anyrate, Windows 7 had better be all that and a bag of chips, or else the hard times will only continue...'<br />&gt;&gt;&gt;&gt;For once, I agree with you. And judging by my own experience from a couple of weeks with the RC, I think it will be.

[Random_Walk]

It might be, if Microsoft doesn't screw it up, and they generate enough hype for it (that is, more than they do now). There will be people that balk at the change in interface (especially the XP holdouts), but that will have to be taken into account in the marketing as well.<br /><br />OTOH, all it would take is for a couple of public glitches (and not fixing a certain startup file corruption bug that I've been seeing a bit of), and things could get ugly.

[santuccie]

That's the first I've heard of it. But if there's a bug that serious in Windows 7's code, I imagine they'll get to the bottom of it like they always have. I don't know if it has to do with better schooling under the belts of the systems engineers at MS, or the fact that they make their own kernel from scratch, but I'm unaware of any problem Windows has retained as long as Apple and Linux have suffered from the sleep bug and unstable USB drivers. To this day, the problems persist.

[Mark_Anderson]

A bit worse than I though they would be and I expect next quarter to be pretty grim too. After that revenue should recover when W7 is released.

[Random_Walk]

Windows 7 releases to OEMs and TechNet in August (August 6 according to Microsoft's own blog).

[Mark_Anderson]

Depends if revenue is counted as defferred or not. <br /> <br />If not then they'll have a good Q3.

[Random_Walk]

I think they'll start counting 'em the moment that they release to OEM. OTOH, I don't think it'll make up the difference in Q3. Q4 maybe (Christmas rush), and Q1 2010 (SBE upgrade rush), but after that we'll begin to see what the long-term effects are.

[rmva]

Isn't there usually a lull in PC shipments just before the release of a new operating system. Aren't hardware makers promising hot new hardware "coming October 22" Don't real people defer making PC decisions during the worst recession since the Great Depression? If the answer to all these questions is yes, shouldn't Microsoft's next quarter be even worse than the last?

[baconstang]

I think next Q will be bad as the W7 income won't show until the following Q.

[monkeyfun14]

I find it interesting that most rabid mac fanboys are trying to make claims about me?

[ballmerisanape]

Was that a question? Do you find it interesting?

[Hunnter2k3]

If things continue like this, Google could really benefit from it when they release their OS.<br />But i believe Windows 7 will actually kickstart sales into action again. Every new major OS release tends to, even if it was crap.<br />If Windows 7 is good enough, it might stabilize things, maybe even push it to the positive.<br /><br />Also, Apple showing a good quarter is signs that Microsoft are failing in the marketing area a little.<br />Mind you, i wouldn't blame anyone switching from Vista to anything else... even DOS... <br />The launch has left a rather persistent nasty aftertaste in the market, even if the newer versions fixed many of the hiccups. (I just generally hate it altogether, it looks and runs awful, even on my fairly high spec machine, which isn't even the point anyway, the fact it even NEEDED it is)

[baconstang]

Quick.... more "Laptop Hunter" ads!

[Mr. Dee]

1.2 Billion Windows users are still satisfied, you just wait until October 22nd.

[ballmerisanape]

Complacent is probably a better word.

[AllenKids]

@Mr.Dee<br /><br />1.2 billion Chinese still satisfied with da government.<br /><br />Seriously, troll different.

[RompStar_420]

Bill Gates is going to have to come out of retirement to save his company! LOL

[Hunnter2k3]

I honestly think he doesn't care much about the future for Microsoft to be honest.<br />He saw the mess that was about to happen and got out before it all hit the fan.<br />And boy, i bet he was glad he did.<br /><br />He has all the money he will need, he is smart enough to get more very easily, and now he has none of the pressures he once had to deal with.

[Random_Walk]

"He saw the mess that was about to happen and got out before it all hit the fan."<br /><br />I'm thinking the same thing... One's reputation can get more important than the means by which one got it sometimes.

[Norseman]

Apple revenue up 12%<br />Microsoft revenue down 17%<br /><br />The explanation, in part, is that Apple has something called a "business plan" that amounts to more than "Let's call the next one Windows 8 and roll out a few more versions. How does 'Super Fantasmic Home Ultimate' sound?"

[lazycat202]

Microsoft does't make iPhone. It's software company. If you compare Apple and Microsoft as 2 software companies, you will see. Apple's stock is up because it has invented a cool toy.

[Random_Walk]

Compare OSX numbers to Windows, then:<br /><br />Apple was up 4% YoY - what was Microsoft's drop again? (trick question, but only a little, since we can only count revenue, not unit sales for Microsoft, but I'm willing to bet that the unit numbers dropped).

[The_happy_switcher]

Where was the pre-earnings warning from Microsoft that should have come a month ago? They missed the revenue target by a country mile. Class action lawsuit coming from the shareholders any time soon? Talk about firing on NO cylinders. And if you think Win 7 is going to save the SS Microtanic think again.

[The_happy_switcher]

"Redmond, we have a problem. We can't seem to locate 1.2 billion in lost revenue. Oops." Maybe it's time to fire monkey- boy Ballmer. Zune. Vista. Clippy. Bob. Xbox360 ring of death. And the 'hits' kerp coming. LMAO. Microtanic shareholders are now lighting the torches and getting ready to storm Ballmer Castle.

[monkeyfun14]

1021 ignorant trolling comments from you. Damn you must be trying to set a record.

[The_happy_switcher]

With 1738 you already have me beat. By the way, I see you can't refute my truthful comments so it ain't trolling--it's called the truth. Microsoft is a bumbling inept behemoth whose best days were 15 <br />years ago.

[jezzali]

@ JasonCe,<br /><br />You can astroturf for Microsoft all you like and indulge in wishful thinking about Bing until the cows come home. But I was telling people three years ago to sell their shares in Microsoft and invest elsewhere because if you don't you're going to lose money. One company I suggested investing in was Red Hat. Nobody took my advice seriously.<br /><br />They're taking it seriously now.

[Mark_Anderson]

No, they're not. <br /> <br />Seriously.