Dissecting Microsoft’s First Bad Year

Dissecting Microsoft’s First Bad Year

by Carolyn April

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Despite a humbling the likes of which it’s never before seen, Microsoft and its channel partners have three reasons for optimism in 2010: The pending product releases, starting in October with Windows 7, Windows Server 2008 R2 and Office 2010. But first, read on as we examine what happened in 2009, group by group.

Sales Slip

Revenue declined across all segments driven primarily by weakness in the global PC market and the unfavorable economic environment, according to Microsoft.   • Revenue for the fourth quarter 2009 declined 17% to $13.1 billion, missing analysts’ sales estimates by $1.27 billion.  • Revenue for the year fell 3% to $58.44 billion, marking the first time since the company went public in 1986 to experience a full-year drop in sales.

Profits Take a Hit

Net profit, for the most part always stellar historically for Microsoft, also fell.  • Fourth quarter 2009 net profit dropped a whopping 29% to $3.05 billion, compared to $4.30 billion for the same period in 2008.  • Net profit for the year didn’t come in much better, falling by 18%, to $14.57 billion.

Weak Windows

Quarterly and full-year sales of Microsoft’s flagship Windows software dropped for the first time ever. One point of blame hangs with PC OEMs such as HP, Dell, Lenovo and others that have been just shellacked by the recession. But a few other reasons are at hand: One, Windows Vista, the existing client OS, has failed miserably to take hold in marketplace (Forrester estimates that 86% of corporate desktops remain running Windows XP) and two, many buyers are now waiting for the arrival of Windows 7.  • Microsoft’s Client Business, which includes Windows, saw sales fall 29% for the quarter, 13% for the year.

Office Stalls

Microsoft’s Business Division, which includes the Office juggernaut and Dynamics business software, is the company’s largest division and did not fare well either. Decreases in revenues for Office, which accounts for a massive 90% of the Business Division sales, reflected PC market weakness, according to Microsoft. The impact of free software, such as Google Apps and Zoho, can not be understated, either. Microsoft has taken notice, announcing free Office Web Apps, while also launching a competitive bid to woo ERP rival Sage Software’s partners and customers.  • Revenue for the Business Division was down 13% for the quarter, and flat for the year.

The Golden Child

The Server & Tools division is the lone group in the company to escape relatively unscathed, yet still saw its sales decline. But this group, which includes Windows Server, SQL Server, BizTalk Server, along with developer tools, has been positioned as a growth driver for the company and is the core platform that legions of Microsoft’s devoted ISVs use. What’s more, as analyst firm Ovum points out, the group’s results look even stronger in the context of a server hardware market that is down more than 20%.  • Revenue for the division was down 6% for the quarter but up 8% for the year.

Ouches in Online Services

The Online Services Business division continues to be Microsoft’s Achilles heel. But there is a bright spot, and CEO Steve Ballmer was not shy to point it out and shout to the rafters at July’s Worldwide Partner Conference. That bright spot is Bing, the company’s search engine challenge to Google that has stolen market share and shown some serious promise. What remains to be seen is what kind of channel play, if any, there is for Bing looking ahead into 2010.  • Online Services saw a 13% drop in revenue for the quarter and was flat for the year.

Oh, the XBox

The Entertainment and Devices division also suffered drops in sales. The division includes XBox, which unquestionably has to be hurt by the popularity of Nintendo’s Wii gaming phenomenon. Microsoft also has such its work cut out in the music player department, with its Zune no match at the checkout counter for Apple’s iPod. The big question mark is where and how Microsoft will finally make a corporate stand with mobility. Rumor has it that much is coming down the pike, including a new release of Windows Mobile, next year.  • The Entertainment and Devices division was down 25% for the quarter and 6% for the year.

Belt Tightening Softens the Blow

Microsoft offset its losses significantly this year with stringent cost-cutting measures, including the first-ever wave of massive employees layoffs.  • Sales and marketing expenses decreased $691 million or 18%, primarily driven by the resource management program.   • Headcount-related expenses decreased 6%, primarily driven by the resource management plan.

Looking Ahead: Concerns

  1. Can Microsoft maintain solid sales for its flagship Windows and Office products so it can aggressively pursue more lucrative areas like search, mobility, enterprise applications and security?  2. Will Microsoft be able to get its online services and "Software+Services" initiatives to a model that the channel will support and promote?  3. Will PC sales make a comeback?

Looking Forward: Brightspots

  1. Windows 7: It’s coming in October and judging by early partner reviews, it’s going to be welcome to work with. And, surprise, end users like it too.  2. Windows Server 2008 R2, the next version of flagship server OS coming in October and brings new virtualization capabilities, new management tools and a new version of Internet Information Services.  3. Office 2010 includes a slew of enhancements, including an overhaul of the navigational ‘ribbon’ to make it simpler and more intuitive to use.