Microsoft Points To Tech Refresh As Profits Fall

Microsoft has capped off a busy week after revealing declines in both revenues and profits, but despite this, it still managed to beat market expectations.

With the release of Windows 7, Microsoft is hoping that both consumers and businesses will be in the mood to buy new PCs and Microsoft products.

Microsoft’s revenues of $12.92 billion (£7.78 billion) represented a 14 percent decline year-over-year from 2008. Operating income, net income and diluted earnings per share for the quarter declined 25 percent, 18 percent and 17 percent, respectively, over the same quarter in 2008.

Nonetheless, Wall Street analysts and Microsoft executives both seemed satisfied with the announced results, which were stronger than earlier estimates. When trading opened on Wall Street, Microsoft’s shares rose 8 percent.

In a statement before the earnings call, Microsoft chief financial officer Chris Liddell suggested that the company had “maintained our cost discipline, which allowed us to drive strong earnings performance despite continued tough overall economic conditions.”

For the fourth quarter of 2009, Microsoft had reported a 17 percent decline in year-over-year revenue, with earnings of $13.10 billion ($7.89 billion). The economic recession and attendant decline in PC sales has had an accompanying effect on Microsoft’s bottom line, reducing demand for its core products such as Windows.

Microsoft reported that it was deferring $1.47 billion (£855 million) in revenue due to the Windows 7 Upgrade Option program and sales of Windows 7 to OEMs and retailers before the operating system’s launch date. With that money reintegrated into the bottom line, Microsoft’s overall revenues became $14.39 billion (£8.67 billion), a year-over-year decline of only 4 percent.

During the earnings call, Liddell suggested that there could be proverbial “green shoots” ahead for Microsoft if the economy – and PC sales – picked up in 2010.

“Windows division revenue will be in line with overall PC growth,” Liddell said, adding: “Our strategies will position us to take advantage of the economic recovery.”

With regard to the larger industry, Liddell suggested that “CIOs remain cautious about spending through the end of the year,” which may set the beginning of a tech refresh throughout the enterprise and SMBs (small- to medium-sized businesses) in 2010. Liddell also felt that a tech refresh might be a more gradual process extending beyond 2010 into the next few years.

In line with that CEO thinking, Microsoft is staying “reasonably cautious” about the Windows 7 upgrade cycle, according to Liddell. Even so, “Feedback is good at this stage from corporate in terms of Windows 7.”

Microsoft’s Windows XP currently powers 80 percent of all commercial PCs, according to a report from research firm Forrester. Despite the stability of that platform, however, support from Microsoft and independent software vendors (ISVs) will gradually decline, with extended support for Windows XP Service Packs 2 and 3 ending in April 2014.