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Microsoft's Bloodied Nose

It was another bad quarter wrapping up a bad year for Microsoft, with quarterly revenue, operating income, and net income respectively down 17 percent, 30 percent, and 29 percent. The company's FY 2009 annual revenue was down 3 percent from the previous year -- the first time I can remember the company having a year-over-year income drop. Annual operating income and net income were also down, 9 percent and 18 percent respectively.

On the Q4 income front, at least, Microsoft had a bit of an excuse in the form of legal bills, severance expenses, and "impairments to investments." But such things will happen and they don't have to be such a kick in the rear, as evidenced by Amazon in its earnings announcement yesterday. And it's not as if retail, whether online or in a store, was experiencing any great shakes in the economy.

Microsoft's excuse was "weakness in the global PC and server markets," according to CFO Chris Liddell, and that certainly was a factor. But in the somewhat diversified world of the company's business, things didn't look terribly good anywhere, as the following snippet from the company's 8-K yesterday shows:

The absolutely only bright spot in a year-to-year comparison of revenue was in the server and tools business, which showed 7.8 percent growth. Even the Microsoft Business Division, otherwise known as Office, looked relatively good being virtually flat compared to the year before. But everything else took a beating:

  • Client, down by 12.8 percent
  • Online Services Business, down by 3.9 percent
  • Entertainment and Devices, down by 5.5 percent
For Microsoft, this was a bloodbath. And that's on a revenue basis, not even looking at earnings. Granted, the market has been tough, but even with the pressures on IT spending, Microsoft managed to see a boost in annual sales and operating income in servers and tools. In a year when the Xbox should have cleared ever more profit because of its lifecycle phase, operating income for the division was only about 2.2 percent of revenue. And look at the difference in operating income as a percentage of revenue for Online Services: a 38 percent loss in 2008 and a whopping 80 percent loss in the fiscal year just closed.

It's been a tough market for the entire industry, but there have been some significant examples of success in areas parallel to Microsoft's business that you could largely associate with management and not accident. Microsoft is just working badly in comparison and losing money as a result.

I also think it's fair to say that the conditions to which Microsoft points are not the real issue. What we're seeing are fundamental changes in many aspects of business, the economy, and society. Trying to cope by doing more of what worked in the past is nothing more than wishing things would be the way they once were.

Image via stock.xchng user nookiez, site standard license.

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