After seeing gains for 12 trading days in a row, Nasdaq investors were due for a wake-up call. The news from the tech sector during this earnings season has been less dire than feared, but that doesn’t mean the recovery is here yet.
Microsoft duly brought things down to earth on Thursday. What was most striking in its weak second quarter results was a 29 per cent slump in revenues from the Windows client business. Didn’t Intel just report a snap-back in the PC business as manufacturers corrected for their earlier aggressive inventory reductions – and didn’t Microsoft itself say that sales of PCs to end-customers only fell by 5-7 per cent in the latest quarter?
A number of things lie behind this poor PC operating system performance:
Netbooks. Had it not been for netbooks – which now account for 11 per cent of all PC sales, according to Microsoft – the PC market would have been down 16-18 per cent in the second quarter. The lower price that Microsoft receives for Windows XP in netbooks eats into sales.
Business customers. Businesses buy more expensive versions of Windows, and these are the customers which have cut back most on PC purchases. That translated into a striking 13 percentage point reduction in the proportion of “premium” versions of the software sold to PC manufacturers, which was down to 59 per cent.
Windows 7. Microsoft also had to defer $276m of revenues earned in the quarter to reflect the Windows 7 upgrade guarantees it made to new PC buyers.
Dire as all this looks, the imminent Windows 7 product cycle should put things back on a more even keel, and Microsoft predicts that its Windows client revenues will grow in line with the overall PC market in its current fiscal year, which has just begun. But Thursday’s rude awakening is a reminder that Microsoft – and the rest of the tech sector – is not out of the woods yet.
