Bummer for Microsoft

Ashlee Vance has an article in The New York Times about the decline (though not fall, alas) of Microsoft:

Microsoft, the once-swaggering giant of the personal computer industry, has been humbled, both by the recession and by problems of its own making. On Thursday, the world’s largest software company reported its worst fiscal year since it initially sold stock to the public in 1986. Year-over-year revenue and full-year sales of Microsoft’s flagship Windows software dropped for the first time.
“Clearly, Microsoft is not immune to the economic downturn,” said Brendan Barnicle, a software analyst with Pacific Crest Securities.
Many prominent companies tied to the PC industry have watched about one-fourth of their revenue vanish as business customers in particular have scaled back new PC purchases. Microsoft makes more money from versions of Windows tied to business computers than it does on cheaper machines aimed at consumers. If businesses start buying again, Microsoft should benefit from higher overall sales and rising profits. But the economy’s pinch is not solely to blame for Microsoft’s problems. The company’s Windows Vista software, hailed in 2007 as the most significant product in the company’s history, has failed to attract businesses in any meaningful way because of problems with compatibility and speed.
According to a study by Forrester Research, 86 percent of corporate PCs continue to rely on the eight-year-old Windows XP. Microsoft’s Windows profits have also fallen because of rising interest in the cheap, compact laptops known as netbooks, which rely on the lower-priced Windows XP instead of Vista. Earlier this month, Google revealed plans to sell a direct competitor to Windows for the netbook market, and major PC makers have backed Google in what is most likely a bid to put even more pricing pressure on Microsoft.
The big question haunting Microsoft is when sales of its old-line products like Windows and Office will come back and fuel the company’s aggressive strikes into areas like search, mobile device software and online business applications. In its fourth quarter, Microsoft’s net income fell to $3.05 billion, or 34 cents a share, for the period ended June 30. The figures represent a 29 percent drop in net income from the $4.30 billion, or 46 cents a share, that Microsoft reported in the period a year ago.
Excluding charges tied to legal matters, layoffs and investments, Microsoft earned 36 cents a share in the quarter, meeting the forecast of analysts surveyed by Thomson Reuters. Microsoft’s 17 percent drop in quarterly revenue was more troubling to Wall Street, which pushed the company’s shares down more than 7 percent, to $23.70, in after-hours trading. The company took in $13.10 billion in the quarter, missing analysts’ estimate of revenue by $1.27 billion.
For the full year, Microsoft’s revenue declined three percent, to $58.44 billion, while its net income fell 18 percent, to $14.57 billion. On a positive note, Microsoft echoed recent comments from Intel, saying that there had been an increase in PC sales and healthier spending in Asia and the United States.
“There are some signs that we have at least seen the worst,” said Christopher Liddell, the chief financial officer at Microsoft, in a conference call.
In numerous public appearances, Microsoft’s chief executive, Steven Ballmer, has warned that people should not expect a major bounce-back in technology spending when the economy recovers. Rather, he suggested that a new, low bar had been set and that companies needed to adjust to such a reality.
Microsoft’s recent missteps have resulted in a more cautious public stance. In a recent speech, Mr. Ballmer was equivocal about whether the company’s new Windows 7 software, to be introduced in October, would prompt a surge in PC and software sales. “Maybe it will. Maybe it won’t,” he said.
“They want to keep expectations tame in front of Windows 7,” said Israel Hernandez, director of software research at Barclays Capital. “They want to keep things in check until they have better visibility on the economy.”
Mr. Ballmer’s most boisterous recent comments have revolved around Microsoft’s staying power. He has vowed that the company will keep pouring money into research and development until it gets search, mobile software and virtualization software right. Microsoft spends close to $10 billion a year on research — more than any other technology company.
Analysts contend that Microsoft has survived the downturn well enough, posting profits at a time when losses were more expected. They say the company seems destined to capitalize on large-scale PC upgrades, as companies finally give into the pressure of buying new machines.
“They are at a great stage right now,” said Mr. Barnicle.
In the recession, Microsoft has laid off thousands of people and sought to cut far deeper than usual into its cost structure. “In my mind, we are a stronger company than we were a year ago,” Mr. Liddell said.
If the economy recovers as hoped next year, Microsoft appears poised to find its “mojo", as Mr. Ballmer describes it. The company will have revamped its traditional products and will be releasing a new wave of online business software. Microsoft already appears confident enough to revisit a search and advertising combination with Yahoo, which Microsoft failed to acquire outright after extensive discussions last year. Talks about a partnership have intensified in recent weeks, and some people at both companies say they believe a deal could be near.

Rico says this, in a year in which Apple has made record profits... (Hee, hee, hee.)