Microsoft Stumbles After Revenue Disappoints

Microsoft earnings

Microsoft (NASDAQ: MSFT) reported year-over-year declines in revenues for both its 2009 fiscal year and fourth quarter. While industry observers had been expecting another slide in sales, it was how much the figures were down that caught investors off guard — with both sets of numbers well below analysts’ earlier predictions.

The company said it brought in $13.10 billion in revenue for the fourth quarter, which ended June 30 — a 17 percent decline from the same period a year ago. Meanwhile, net income came in at $3.05 billion, or $0.34 per share. That constitutes declines 29 percent and 26 percent, respectively, compared to last year.

Before one-time charges, Microsoft posted income of $0.38 per share, two cents ahead of Wall Street expectations, according to Reuters Estimates.

For the entire fiscal year, Microsoft pulled in $58.44 billion in revenue, declining 3 percent from fiscal 2008, down from $60.42 billion last year. Additionally, the company said full-year net income dropped to $14.57 billion, or $1.62 per share — a decline of 18 percent and 13 percent, respectively.

In the run up to Thursday’s earnings announcement, estimates from Thomson Financial had Wall Street expecting full-year revenues at $59.66 billion and earnings per share of $1.70.

As with the third fiscal quarter, analysts were expecting a decrease in both quarterly and annual revenue over the same periods last year.

It was the second straight quarter that Microsoft posted year-to-year revenue declines.

In the third fiscal quarter of 2009, Microsoft brought in $13.65 billion in revenues, a slide of 6 percent from the same period a year earlier. Net income came in at $2.98 billion with earnings totaling $0.33 per share — which represented declines of 32 percent and 30 percent over the prior year, respectively.

“This is the first year that their overall revenue fell in all five business segments,” Matt Rosoff, research vice president for corporate news at Directions on Microsoft, said during a conference call to discuss the company’s results.

Company executives said they are doing everything possible to bring down expenses. On a conference call with financial analysts Thursday afternoon, CFO Chris Liddell noted that the company had decreased expenses by $3 billion more than he had predicted earlier in the year.

Liddell also said he expects the economy to begin a serious recovery perhaps as soon as the end of 2009.

“We’re still not out of the woods,” he said. “I see a difficult economy until the end of this calendar year.” Still, he said he remains optimistic about Microsoft’s performance: “The company is in my opinion in the best shape that I’ve ever seen.”

Microsoft has taken a number of high-profile moves to cut costs. The company laid off approximately 5,000 employees in the third and fourth quarters as part of a concerted effort to cut expenses — the first major layoffs in the company’s 34-year history.

Rosoff, at Directions on Microsoft, agreed that the company is taking the right steps while the economy is down.

“Microsoft still remains a pretty strong cash making machine,” he said. “The company has been fastidiously preparing for the point where the economy recovers, doing things like building up its cash reserves, freezing salaries, and the layoffs. That should position it to leap into gear at the first opportunity.”

“When the economy resets, you might expect them [Microsoft] to pick up faster than their competitors,” he added, although he said that if the economic drought continues, more pain might be ahead for the company.

“If the economy does not recover and Microsoft doesn’t recover with it, then we could see more headcount reductions,” Rosoff add.

In the meantime, all eyes are a key factor many are hoping to help revitalize not just Microsoft, but much of the IT sector: Windows 7.

At the moment, the company is carrying out a carefully choreographed, though so far low-key, marketing program for Windows 7. The replacement for the slow-selling Windows Vista promises to become a bright spot in Microsoft’s 2010 balance sheet when it ships in October.

The final gold code for Windows 7 — known as “Release to Manufacture,” or RTM, was ceremoniously signed off by CEO Steve Ballmer Wednesday afternoon at the company’s annual sales meeting in Atlanta.

The atmosphere of excitement surrounding early promotional sales of Windows 7 in the past few weeks were reminiscent of earlier successful Windows launches, such as Windows 95. Upgrade editions of Windows 7 held the top two spots on Amazon’s best selling software list for the duration of the promotional pricing, which cut costs to consumers by more than half over suggested retail prices.

During today’s call, Microsoft’s Liddell highlighted Windows 7’s approaching launch, saying it’s “just around the corner.”

Rosoff agreed that its arrival will help Microsoft’s bottom line, although not immediately because it doesn’t go on sale until late October.

“Windows 7 is going to be interesting … it will probably help in Q2 and Q3,” he said.

For the short term, it’s unclear how much investors’ optimism over Windows 7’s RTM will cushion the blow from missing Wall Street revenue estimates. Shares of MSFT are down 8.10 percent in after-hours trading, at $23.46. The stock closed up 3.06 percent at $25.56 ahead of the earnings announcement.

Microsoft executives are expected to reveal much more of their thinking regarding the company’s future offerings and plans when they host the Microsoft’s annual Financial Analyst Meeting on July 30, at the company’s headquarters in Redmond, Wash.

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