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Hammered by weakness in the PC and server industries, Microsoft this week stumbled to its first-ever year-on-year quarterly revenue decline. But Microsoft partners are confident that when viewed through the lens of time, this will come to be seen as an aberration resulting from the most challenging economy in decades.
Still, there's no denying that Microsoft's Q3 results were grim: Profit fell 32 percent during the quarter, overall revenue fell 6 percent, and Microsoft's Client division revenue fell 15.4 percent year-on-year, the third consecutive decline for what had for years been a trusty revenue engine. Microsoft Chief Financial Officer Chris Liddell said the company expects the weakness to last at least through the next quarter, calling the situation "the most difficult economic environment the company has faced in our history."
Giddy with schadenfreude, Microsoft bashers hailed the revenue decline as a sign of things to come, and as just desserts to Microsoft for not adjusting its business model to meet the challenges posed by Apple and Linux.
But oddly enough, Microsoft shares closed trading Friday up nearly 11 percent and are now at their highest levels since January. That's because Microsoft actually did better than some Wall Street analysts had expected. Likewise, the prevailing belief in the Microsoft channel is that one bad quarter in 23 years is no reason to panic, and Microsoft's growth prospects in areas like virtualization and Windows 7 remain strong.
Microsoft's revenue shortfall during the third quarter was likely due to its focus on new products such as Windows 7, says Jennifer Mazzanti, president of eMazzanti Technologies, a Hoboken, N.J.-based Microsoft Gold partner. "Microsoft has been devoting more of its time and investment to future products, and less to sales and marketing of existing ones, and that has had a direct effect on revenue," she said.
Windows 7, Office 2010, Exchange 2010, and potentially a new search offering are all slated for release in the next year. CFO Chris Liddell said the company won't deviate from the planned release wave even though these products will most likely be launched at a time when companies are still operating under heavily constrained budgets.
Indeed, Microsoft sees great benefits in relying on its ability to weather economic storms like the one currently raging, a luxury that smaller companies simply don't have.
"At the moment, it's about surviving the economic reset, and going into the growth pickup with a very good set of new products. And the environment of one to two years out starts to look more interesting," Liddell said in the earnings call.
Lee Nicholls, global solutions director for Microsoft technologies at Getronics, a global Microsoft Gold partner, says many companies have decided to skip Vista, but there's a general sense of optimism about Windows 7.
Microsoft beta testers have praised Microsoft for streamlining Windows 7 and boosting its performance, and according to reports, the company is preparing to issue the Windows 7 Release Candidate to testers next month.