Last week, Microsoft released its results for its first fiscal quarter, ended 30 September 2008. The company reported $15.1 billion in quarterly revenues, up 9% from the previous year’s first quarter. Operating income, by contrast, grew only 2.5% to $6.0 billion. Still, 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, says Ovum, the analyst.
“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. We wouldn’t bet against it,” says Dwight Davis, Vice President at Ovum, the analyst.
According to Davis, two decades of diversification have served Microsoft well. “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 ($4.1 billion in revenues) was flat compared to the prior year’s first quarter, and actually saw operating income fall by $200 million to $3.1 billion. However, relatively strong results in several of Microsoft’s other critical business units more than made up for the flagship Client unit’s shortcomings”, he added.
Among the positive quarterly results, the Business Division (which includes Microsoft Office, SharePoint, Dynamics and other properties) saw revenues increase by 20% to $4.9 billion and operating income grow 20% to $3.26 billion. The Server and Tools business unit’s revenues grew 17% to $3.4 billion, with operating income growing 23% to $1.08 billion and the Online Services Business (largely online advertising based) grew revenues by 16% to $770 million, although this business continued to lose money – $521 million 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”, says Ovum’s Davis.
Familiarity and market presence benefit Microsoft in tough times but not even Microsoft is immune to a worldwide economic slowdown. In anticipation of worse to come, the company plans to cut its operational expenses by $400–500 million during the remainder of its fiscal year. “It hasn’t instituted a hiring freeze, but indicates it won’t match the 15% growth in headcount that it achieved last fiscal year (which it ended with approximately 91,000 employees)” he adds.
