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Issue Date: October 2008

Microsoft weathers early economic downturn

October 2008

Microsoft last week released its results for its first fiscal quarter ended 30 September. The company reported $15,1bn in quarterly revenues, up 9% from the previous year’s first quarter. Operating income, by contrast, grew only 2,5% to $6,0bn.

The results are solid enough to suggest that the company's market position, value proposition and business diversification shield it from some aspects of the worsening macro-economic environment. Even as it hunkers down for what could be a long and deep worldwide recession, Microsoft believes it can outperform the overall IT market and continue to achieve healthy growth rates.
If nothing else, Microsoft’s first-quarter results show that the company’s 20-year effort to expand beyond PC client software now allows it to balance weaknesses in some areas with strengths in others.
In its first fiscal quarter, for example, Microsoft’s Windows Client business ($4,1bn in revenues) was flat compared to the prior year’s first quarter, and actually saw operating income fall by $200m to $3,1bn. However, relatively strong results in several of Microsoft’s other critical business units more than made up for the flagship client unit’s shortcomings.
The Business Division (which includes Microsoft Office, SharePoint, Dynamics, and other properties) saw revenues increase by 20% to $4,9bn and operating income grow 20% to $3,26bn. The Server and Tools business unit’s revenues grew 17% to $3,4bn, with operating income growing 23% to $1,08bn. The Online Services Business (largely online advertising based) grew revenues by 16% to $770m, although this business continued to lose money: $521m in operating income during the quarter.
Beyond product diversification, Microsoft has been able to persuade customers that it offers a compelling value proposition, even in an environment where it must compete against low-cost alternatives such as open-source products and subscription-based online services.
Despite the fact that its initial prices are higher than some of these alternatives, Microsoft exploits its products’ familiarity and relative ease of use to deliver a total cost of ownership message that many companies facing tight IT budgets find convincing.
Not even Microsoft is immune to a worldwide economic slowdown, of course. In anticipation of worse to come, the company plans to cut its operational expenses by $400m–$500m during the remainder of its fiscal year. It has not instituted a hiring freeze, but indicates it will not match the 15% growth in headcount that it achieved last fiscal year, which it ended with approximately 91 000 employees.
That said, Microsoft is also looking to capitalise on any silver linings it can find within the darkening economic cloud. For instance, it is likely to take advantage of depressed company valuations to continue making strategic acquisitions.
Last fiscal year, despite failing in its high-profile bid for Yahoo, Microsoft averaged about two acquisitions per month. With $25bn in cash and investments on hand, Microsoft is not capital-constrained. The main barrier facing new M&A; bids, according to Microsoft’s CFO, will be its ability to manage and integrate any acquired companies and products at a time when its own employee base may be running lean.
In today’s environment, when most economic reporting is heavy on doom and gloom, Microsoft’s guidance for the remainder of its fiscal year seems almost Cassandra-like. For its second fiscal quarter, ending 31 December, Microsoft forecasts revenues to be in the range of $17bn-$17,8bn, and operating income to be in the range of $6,1bn–$6,4bn.
For its full fiscal year, ending 30 June 2009, Microsoft expects revenues to be in the range of $64,9bn–$66,4bn, and operating income to be in the range of $24,4bn–$25,5bn. By comparison, Microsoft’s fiscal 2008 revenues were $60,4bn and its operating income was $22,5bn.
Microsoft’s guidance suggests that, for the near term at least, the company may be all but recession-proof. Uncertainty surrounding the severity and duration of the economic slump make it impossible to assess the probability of Microsoft’s rosy scenario. But it is clear that the vendor’s many strengths give it a level of financial security that most companies can only envy.
Source: Computergram


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