Slow Vista sales hit Microsoft revenues as netbooks gain ground

But the company's server software group is up 15% on Hyper-V strength, says analyst

Sales of Windows desktop software dropped 8% last quarter compared to a year ago, while Microsoft Corp.'s server division revenues were up 15%, illustrating the rejection of Windows Vista and the acceptance of Windows Server 2008, an analyst said Thursday morning.

"Very disappointing results from the Windows Client unit," said Neil MacDonald, an analyst with Gartner Inc. "But it was very predictable, especially after Intel's earnings report." Last week, Intel announced that its fourth-quarter profit plummeted 90%.

Revenues for the Windows client group totalled $3.98 billion in Microsoft's second fiscal quarter, which ended Dec. 31, 2008, down 8% compared to the same period in 2007 because what the company called the "PC market weakness and a continued shift to lower priced netbooks."

MacDonald echoed those reasons, but added more detail. "When people look at opportunities for cost savings, they first think about not replacing computers," he said. "They try to get another year of life out of their notebooks and desktops. And that goes right to Microsoft's bottom line [in the Windows client unit]. If PCs aren't selling, Microsoft's not making money."

But Windows Vista -- 2007's problem- and perception-plagued operating system -- also played a major part in the revenue drop, said MacDonald. "Compounding the problem is the fact that Vista has been a very disappointing release. That makes a bad situation worse."

MacDonald, along with fellow Gartner analyst Michael Silver, made waves last year by arguing that Windows was "collapsing" because of the operating system's increasingly bloated code base and inability to roll out upgrades in a timely fashion.

In a sideways fashion, Microsoft confirmed that Vista's sale were down significantly in the quarter quarter. "There was double-digit declines in premium SKUs" of both the business and consumer lines of Windows, said Frank Brod, Microsoft's chief accounting officer, referring to the higher-priced editions, including Vista Home Premium, Vista Ultimate and Vista Business.

The bright spot, according to both Microsoft and MacDonald, was the growth in sales of "netbooks," the new category of small, lower-priced laptops. But even that came with a price. "The uptake in netbooks also played a part, because although there was growth in that segment, those machines are running Windows XP," said MacDonald. "Vista doesn't fit."

Microsoft makes less on Windows XP per copy that it sells to computer makers than it does for Windows Vista.

While the client-side revenues took a dive, sales for the Server and Tools division were $3.74 billion last quarter, a 15% increase over the same period in 2007. "Double-digit growth, that's fantastic results given this economic climate," said MacDonald.

The server group, which released Windows Server 2008 almost a year ago, "has been on a roll, even in this tough economy," said MacDonald, who spelled out several reasons.

"The move to virtualization is a clear cost savings for companies," he said, noting that Microsoft gives away its Hyper-V virtualization software and sells its management tool "at a very aggressive price."

MacDonald pegged Hyper-V and the also-important widespread accolades for Windows Server 2008 as key drivers in Microsoft's impressive gains.

The near future doesn't look much brighter for Windows client, MacDonald said. "There's a glimmer of hope in the second half of the year," he argued. "If Windows 7 comes out in advance of the holiday season, consumers may once again get excited about buying a new computer.

"Consumers and businesses can't continue to run their old machines forever," he said.

Microsoft released a public beta of Windows 7 on Jan. 10, a fact that company executives mentioned several times Thursday morning during the conference call with Wall Street analysts.

The company also announced that it would cut 5,000 jobs, with first 1,400 layoffs slated for today.


Copyright © 2009 IDG Communications, Inc.

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