Summary
o Microsoft's earnings disappointment was influenced by product release dates, in particular the Windows 7 operating system.
o The pending release of Windows 7 caused the many PC and associated software sales to be delayed.
o The home market will quickly respond once Windows 7 starts shipping with new PCs; businesses will remain cautious until PC software applications have proved to be compatible and Windows 7 tested in pilot implementations.
Analysis
On July 23, 2009 Microsoft announced revenues of $13.10 billion and income of $3.05 billion for the fourth quarter of FY 2009 (period ending June 30, 2009). While these numbers were down 17% and 29% respectively from the numbers reported for the fourth quarter of FY 2008, is likely more a result of the timing of product releases such as Windows 7 rather than an indication of an impending disaster. In fact, Microsoft stated that it was adversely affected by the weakness in the global PC market and that $276 million of revenue associated with the Windows 7 Upgrade Option program was being deferred.
I believe that while the economy is not helping, one of the reasons for the slowdown in PC sales is a reluctance by individuals and businesses to embrace the Vista family of operating system. Many organizations have stayed with their current PCs and remained with Windows XP. Some organizations that acquired new PCs with Vista have even chosen to "downgrade" to Windows XP as new PCs required a Vista license. I believe that there is significant pent-up demand for new PCs and that once Windows 7 ships with new PCs this demand will boost PC sales.
I further expect the home and home office user to lead this demand while businesses will follow. This results from two causes: 1) businesses are more likely to be dependent on specific PC-based applications that will need to be migrated and tested on Windows 7 and 2) large organizations will conduct pilot projects to uncover any serious bugs and incompatibilities before a massive roll-out of Windows 7 to their entire organization. Some companies may even wait until after the first service pack for Windows 7 is released.
While Microsoft has tried to counter the delays caused by the pending release of Windows 7 by offering a free upgrade to those that purchase a Vista-based PC prior the October 22, 2009 release date for Windows 7, many users will wish to avoid an operating system upgrade and will likely wait until they can acquire a PC with Windows 7 pre-installed.
Although Microsoft may not be the only game in town, it remains the defacto standard and the company to beat for both PC operating systems and office productivity suites. Its last quarter may not have been spectacular (although $3.05 billion in net income is definitely not small change!), and netbooks and the recession are taking their toll, but once Windows 7 is released, Microsoft's financials will likely be better.
Michael Schiff consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
