Microsoft: Netbooks, penny-pinching enterprises slash Windows profit by a third

Microsoft Corp.'s mightiest money-spinner, the Windows operating system, continued to be dragged down by the poor economy, the company said Thursday, as consumers opted for inexpensive netbooks and businesses held off on PC upgrades.

Windows 7's arrival -- it was released to manufacturing yesterday, and will be generally available on Oct. 22 -- will offer "potential for improvement," said Chief Financial Officer Chris Liddell in a conference call with Wall Street as it released its fourth quarter financial report. However, sales may not start to grow again year-over-year for another six months, he said.

Windows client revenue for the fourth quarter, which ended June 30, was $3.1 billion, down 29% from $4.36 billion the year prior. Profits were hit even harder, down 33% to $2.17 billion.

Much of this was the result of customers eschewing pricier, higher-end versions of its products, such as Premium, Ultimate or Enterprise. Those higher-end versions, what the software maker calls "Premium Mix," made up 59% of Windows sales during the the quarter, down from 72% a year ago, hurting Microsoft's margins.

Liddell cited two reasons. First, shipments of traditional PCs, such as laptops and desktops, fell 16% to 18%. That was partly made up by growing shipments of inexpensive netbook computers. As a result, the worldwide PC market fell just 5% to 7% unit-wise.

The problem for Microsoft is that netbooks to date come installed with Windows XP, for which Microsoft earns less revenue than from Windows Vista.

Second, businesses have been holding off on PC purchases, as evidenced by Dell Inc.'s recent poor results. That has also hurt Windows profits, since businesses almost always get premium versions of Windows, Liddell said.

Tight-fisted corporations are also hurting server sales, which is dragging down sales of Windows Server and other software produced by its Server and Tools division. Revenues there fell 6% year-over-year.

In the Microsoft Business Division (MBD), which produces Office, SharePoint and Exchange, sales were down 13% year-over-year to $4.56 billion.

Consumer revenue was down 30% as Microsoft continued to aggressively use promotions to market Office, Liddell said. Business revenue, which makes up 80% of MBD's sales, was also down 10%.

The upcoming fiscal year will "be a transition year for MBD," Liddell said, referring to its launch of subscription-based online versions of Exchange, Sharepoint and Office, as well as the launch of the 2010 wave of the on-premise software. "We won't see revenue growth until the recovery of small-to-medium-sized businesses combined with the impact of Office 2010."

As for Windows, Liddell expects sales to bounce back after the launch of Windows 7, especially since as much as $1.3 billion in deferred pre-sales are recognized during the fiscal 2010 second quarter (the upcoming Christmas quarter).

Revenue growth will "be in line" or "faster" than PC market growth, Liddell said.

For Windows to outpace PC sales, Microsoft may be counting on buyers of netbooks installed with a low-end version of Windows 7 called Starter, to later do an "Anytime Upgrade" to a higher-end version. The apparently authentic prices that have leaked out so far, however, may not be cheap enough to tempt many consumers, said one analyst.

Copyright © 2009 IDG Communications, Inc.

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