Microsoft announced another stellar quarter on Thursday — at least in terms of breaking its old record for revenues in the third fiscal quarter of 2008, which ended on March 31.
However, the quarterly tap dance that the company’s CFO typically performs for financial analysts didn’t impress many of them this time around. One of the reasons: lower sales of Windows clients.
In fact, revenues were indeed up, but not by much — the company brought in $14.45 billion for the quarter compared to $14.4 billion a year earlier. Earnings actually were down from a year earlier at $4.41 billion versus $6.89 billion in the third quarter of fiscal 2007 — an unusual reversal of fortunes.
Microsoft’s stock closed down $1.58 in after hours trading at $30.22 on Thursday night, a loss of 4.97 percent, and then slipped further to $29.83 in Friday trading.
There were many drivers for Microsoft’s disappointing sales and earnings report, among them the $1.42 billion fine that the company paid to the European Commission (EC) during the quarter. One of the most noticeable, however, was the drop in revenue from Windows “client” sales — a line item that includes sales of both Windows XP and Vista.
In the third quarter of fiscal 2008, the client group brought in $4.025 billion, down from $5.274 billion in the same quarter a year ago. Microsoft officials largely ascribed the revenue decline to the revenue “bump” that the company received in last year’s third quarter when Vista and Office 2007 launched.
“Revenue growth for the three months ended March 31, 2008 was driven primarily by increased Xbox platform sales, increased Windows Server and SQL Server revenue, and increased online advertising revenue, offset by decreased licensing revenue from Windows Vista and the 2007 Microsoft Office system,” the company’s latest 10Q stated.
However, some observers have pointed out that, even counting accounting adjustments, sales of Windows clients of whatever feather are at least flat. That’s not a good sign in a fiscal year where Microsoft was hoping to see the arrival of Vista Service Pack 1 (SP1) kick off mass adoption by enterprise customers.
Lacking the ‘ka-ching’ factor
When it was all added up, the results didn’t buoy analysts’ usual enthusiasm for the company’s ‘ka-ching’ factor.
“Revenue growth was slower than they predicted, mainly due to a slow down in OEM PC sales growth,” Matt Rosoff, financial and legal affairs analyst at Directions on Microsoft, told InternetNews.com.
Still, Rosoff did not blame the fall off on Vista. Instead, Rosoff said that it is not possible to decipher what it all means for sales of Vista, since it doesn’t break out Vista from XP sales. “They make money either way,” he added.
Microsoft officials say the company has now sold 140 million Vista licenses (not counting sales via Enterprise Agreements since customers can choose to install either operating system).
Dwight Davis, vice president at researcher Ovum Summit, took a similar view to Rosoff’s, but added that the lack of details and the decline in Client revenues seem a little ominous.
“[I didn’t get] a good feeling about how they’re doing with Vista,” Davis told InternetNews.com.
Meanwhile, the company’s CFO, Chris Liddell, said that the company’s offer to buy Yahoo expires this weekend, and that Microsoft has no intention of raising its offer for the search giant. He also said that the pursuit of Yahoo has had no impact on Microsoft’s financials, and that losing the bid would not make or break the company’s strategy.
“We’re committed to competing in online advertising through organic acquisitions,” Liddell said on a call with financial analysts on Thursday. “[If there’s no deal] we’ll reconsider our alternatives either to take our offer to the shareholders or to [go elsewhere].”