Microsoft's Earnings-What It Means for Partners

"Historic", "unprecedented", "dismal", "shocking", "nasty quarter"-These were some of the words heard in response to Microsoft’s earnings announcement July 23. Indeed the news was startling, as Microsoft (NasdaqGS:MSFT) reported its first annual revenue decline in its history.  In addition, year over year revenue declined in all five business segments.   Quarterly revenue decreased a whopping $1.2 Billion (17%) for the quarter when compared to the previous year.  Moreover, operating income declined a significant 30% year over year for the quarter.  While Windows sales have dropped off overall, sales of lower end netbook SKUs have been growing.  This helps with revenue but is a drag on margin. Microsoft’s results have been strongly affected by the contracting PC market.

Although Microsoft has enacted cost cutting measures and has taken $750 million out of its operational costs for the quarter, the market’s reaction has been negative. 

What can Microsoft’s partners expect, in light of this news? They have already seen Microsoft’s aggressive plans to revamp its partner program. Going forward, it’s likely Microsoft will strongly favor partners who bring in both strong sales results and higher margin business. Program incentives and rewards could be richer for those that are in this elite set.  In addition, it would not be surprising to see partner margins shrink as competition intensifies and Microsoft focuses on increasing operating revenue. A re-alignment and restructuring of Microsoft’s own field sales and support would be expected.

Microsoft CFO Chris Liddell told analysts on an earnings conference call Thursday that 2009 is a "reset" year, and he was encouraged by Microsoft’s prospects in 2010.  More than ever, partners will need to decide where they fit in the new structures, make the appropriate investments and step up their competitive game.  Microsoft may elect to downgrade or terminate non-performers.  Those Microsoft partners with loyal customer bases, who can deliver unique value beyond price and maintain strong customer satisfaction ratings, have the best chance of success in the future.



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