Microsoft’s (MSFT) quarterly results came in higher than expected much to everyone’s delight. The introduction of the Windows 7 operating system gets the credit for a 14% rise in revenue and a 60% rise in profits.
The company’s sales figures should not be surprising. After the disaster known as Windows Vista, any improvement to sales of a new operating system would have been good news for Microsoft. But how good is the news for the PC hardware market?
Analysts had expected a big quarter for Microsoft based on increased PC shipments in the fourth quarter of 2009 and positive results from Intel Corporation (INTC).
Microsoft’s CFO noted that the company “didn’t see enterprise spending growth” in the fourth quarter but that the company believes “a recovery will occur starting this calendar year and gradually over the next several years.”
One way to interpret Microsoft’s results is to attribute the rise to pent-up demand for a successor to the Windows XP operating system, which is now more than 5 years old. XP ran solidly and didn’t require a lot of new hardware. Vista was a flop, failing to drive sales of new hardware and software.
The demand for digital storage, which is really unlinked to operating system changes, grew substantially in the fourth quarter. Both Seagate Technology (STX) and
Western Digital (WDC) sold nearly 50 million drives each during the quarter with record-high gross margins. Chip makers Intel and Advanced Micro Devices (AMD) also performed better than expected in the fourth quarter. Both in storage and in chips, things are getting better and should continue through the first half of this year.
PC sales for the fourth quarter of 2009 grew 24% year-over-year, according to IDC but at the cost of lower margins. Low-priced netbook computers attracted a lot of buyers, but business investment in new hardware has been slow, even with the introduction of Windows 7. One could argue that business buyers still need to fill their pent-up demand for a new operating system and new hardware and that Microsoft and the PC industry should continue to grow throughout 2010.
But business buyers could continue to wait. Replacing XP with Windows 7 means that buyers will also need to replace Microsoft Office or purchase the XP emulator in addition to Windows 7. Credit is still very tight for small businesses, and large enterprises with savvy IT staffs could decide to hold on to Windows XP for a while longer.
Microsoft’s CFO could be absolutely right about the gradual growth in the PC industry that is coming over the next few years. The devices selling the best right now are low-priced and produce lower margins. PC makers could be selling more in 2010 but enjoying it less.
