Microsoft Beats Street, Tempers Outlook

Microsoft (Nasdaq: MSFT) reported better-than-expected financial results Thursday but also warned that the economic downturn will cut into top-line revenue and profits for its current fiscal year, which ends June 30, 2009.

For the first fiscal quarter ended Sept. 30, Microsoft reported US$4.37 billion in earnings, up 2 percent from $4.28 billion during the same period in 2007. Revenue was $15.06 billion during the quarter, up from $13.76 billion a year ago.

In mid-day trading, Microsoft stock was at $22.16 per share, down less than 1 percent.

Beat Wall Street Expectations

"I think their fiscal Q1 results came in better than I expected," Richard Williams, an equity analyst with Cross Research, told the E-Commerce Times. "My superficial response was, 'Wow, they beat top and bottom expectations.'"

However, Microsoft's results were down among all its various businesses on a seasonally adjusted basis, Williams pointed out.

"Software companies have seasons," he said. "Usually, Q2 and Q4 are big quarters, and Q1 and Q3 are smaller. It happened across all the business units -- there's been a two-quarter deceleration. Normally, the last month of the September quarter is the busiest time of the quarter. They told us they really started to notice a change in the air."

There has been a noticeable slowdown in other enterprise software companies -- notably Oracle (Nasdaq: ORCL) and SAP (NYSE: SAP) -- going back at least two quarters, Williams observed.

A slow September at SAP confirmed that spending on IT was slowing down, he said.

"September was a transitional month, and my best guess is that the root cause was the financial crisis," he commented. "SAP reported in the Sept. 30 quarter and had bad results. They even preannounced and made it clear something was going wrong in a big way."

Q4 and Beyond

Microsoft is evidently preparing itself and Wall Street for a protracted downturn.

"Generally, they're clearly bracing for a slowdown and reassessing what they have to do to optimize the cost structure given the economic uncertainty," Sid Parakh, an equity analyst with McAdams Wright Ragen, told the E-Commerce Times. "The quarter looked fine, but a lot is happening out there."

It's possible Microsoft will lay off employees if the economy shows signs of a drawn-out recession, said Parakh. "They're being proactive rather than reactive. They're looking at what they have today and preparing for certain economic scenarios."

The fourth quarter -- that is, Microsoft's second fiscal quarter -- could prove to be eventful, said Cross Research's Williams.

"There will be a change in presidential administrations, and that could have a big impact on IT spending based on their attitudes towards deficits," Williams said. "We also have an economy that could have a really bad Christmas. With more than two-thirds of gross domestic product made up by consumers, that could have a big effect on investment in IT."

That said, Microsoft has a huge war chest and is well-positioned to weather a serious recession. The question is how much its profit levels could be affected.

"Microsoft -- if you view whether it can come out of the recession as a going concern, then, yes, Microsoft could make it through a prolonged depression," Williams said. "But if you're talking about adding meaningful earnings growth, then Microsoft could be facing some problems."