Friday, 24 July 2009

Microsoft slumps

(By Richard Holway 7.00am 24th July 09) Microsoft’s Q4 results last night were even worse than expected with a 17% decline in revenues YoY to $13.1b. This was a billion light on expectations. Profits were down 34% at $3.05b. For the full year, revenues were down 3% at $58.4b. As might be expected, Microsoft shares slumped 8% in after hours trading. That said, Microsoft shares are still up around 60% since their $15 low on March 6th 2009.

Windows, Office, XBox, Server software and web advertising all contributed to the sales decline. Profits would have been even more badly hit but for the $750m operational savings YoY – about 10% of costs.

Microsoft is often referred to as a ‘bellwether’. But this time around Microsoft have special difficulties. Apple has shown that if you have great products with style that the public want – they will still buy them. IBM has shown that if you can help corporates to save money – they will buy from you. Intel has shown that if you have a cheap and powerful chip for netbooks – they will trade down and buy them. RIM has found that even consumers will buy your smartphone. Google has won in search and is now taking the battle to the Cloud. Microsoft doesn’t really have anything that fits in any of those bags.

In particular it has been hit by the rise of Netbooks. Much talked about here on HotViews in the last few years – so if this has come as a surprise to Microsoft they only have themselves to blame. Microsoft has had to offer a cheap version of XP to halt the rise of Linux on Netbooks. So Vista sales have been hit by a double-whammy (Netbooks and a general reluctance of corporates to upgrade) Microsoft Windows division saw a massive 29% decline in revenues to $3.1b in the quarter. Although Windows 7 is imminent, it is being priced to retain share – rather than profit.

The outlook doesn’t look great either. Microsoft says “it’s going to be difficult for the rest of the year”.

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