Microsoft’s earnings stink — and so does its attitude

You probably already know the basics of Microsoft’s fiscal fourth quarter, which ended June 30: It stank. Revenue declined 17 percent and net income declined 29 percent year over year in the company’s fiscal 2009 fourth quarter. The two factors, of course, were the continued recession and the consequent weakness in the PC market. As we all know, Microsoft is still chained to the desktop, and when PC sales tank, so does revenue.

But there’s another factor. The tone-deafness that gave us Vista — and the long denial of any Vista flaws — is still on display. Users? What do we care about them? To take a small example: As with every earnings announcement, Microsoft hosted a Webcast for reporters and rank-and-file investors. Yet when I went to the company’s investor site and clicked on the conference call link, nothing happened, because the Webcast required ActiveX controls in Internet Explorer, and I was using Firefox. Who cares that roughly 20 percent of the world uses Firefox? Use our browser or you can’t play.

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OK, it’s not the biggest deal in the world, but after writing this week that Microsoft’s Linux play isn’t a bad thing for open source, I’m steamed at its clueless and classless behavior.

Meanwhile, the profit picture would have been even worse if Microsoft had not cut spending by $3 billion more than it had forecast last year. The savings came at the expense of thousands of laid-off Microsofties.

Netbook price hike is coming

It won’t come as a surprise to our readers to hear that netbook sales are up sharply, and since they generally ship with Windows XP Home instead of Vista, Microsoft’s margins take a hit. But here’s something Microsoft didn’t say on it public call, but revealed to Matt Rosoff, an analyst with Directions on Microsoft.

The company expects to shift netbooks to Windows 7 Starter Edition from XP Home. That ups the price to the OEM by $20 or $30. Passing all or part of that along to the user is up to the hardware maker, but the switch could cost buyers another 50 bucks, says Rosoff. I’m sure you buyers out there are happy to help Microsoft boost its margins. (Microsoft has also been criticized for monkeying with the definition of a netbook in an attempt to force PC makers to favor laptops that have the pricier version of Windows 7 installed.)

I did see one thing in the earnings that surprised me a bit. What Microsoft calls unearned revenue was essentially flat for the full year. (It was actually down, but only because of some accounting issues, according to CFO Chris Liddle.) Unearned revenue is money the company will earn from already booked license and annuity sales over the life of those agreements.

As Rosoff points out, unearned revenue ballooned three years ago during a big upgrade cycle, and those contracts are expiring. Given the poor economy, I would have expected that number to decline a fair amount, but it didn’t. And that means that despite the recession, businesses are still signing those agreements, and even more significant from the point of view of IT, Microsoft is not engaged in much discounting.

Finally, it’s interesting that both Apple and Intel, two tech bellwethers, reported good quarters recently. Apple, of course, is very much buoyed by sales of consumer gizmos, particularly the iPhone. But Intel’s core business is selling chips into the PC market. All things being equal, Intel and Microsoft should move in tandem. Clearly there’s a bit of a disconnect here, which leads me to think that Microsoft is beginning to see long erosion of its position at the top of the industry — not a lot, but the signs are there.

I welcome your comments, tips, and suggestions. Reach me at bill.snyder@sbcglobal.net.