Announcing results for the fourth quarter of its 2009 financial year, Microsoft reported a 17 percent decline in year-over-year revenue, with every business division lagging. Total revenue for the quarter, $13.1 billion, was $1 billion below what analysts had forecast.


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Chris Liddell, Microsoft’s chief financial officer, characterized the quarter as “one of the most disappointing but also encouraging … in the company’s history.” He added, “We don’t expect trading conditions to improve much, but we don’t expect them to worsen.”

The company earned $3.05 billion during the quarter, close to analysts’ forecasts but down by a stinging 29 percent year over year. But Liddell, boasting that “we are a stronger company than we were a year ago,” hailed more than $750 million in cost cuts, including $105 million of capitalized R&D due to the technical milestones reached for Windows 7.

Noting that Windows 7 has now RTMed (released to manufacturing) in advance of its October 22 release, Liddell said the new OS offers “potential for improvement” and that year-over-year sales could start to grow again in about six months. But a free Windows 7 upgrade currently being offered to those who purchase Windows Vista-based PCs has resulted in a deferral of $276 million in revenue, the company added.

But what about embedded … ?

As usual, it isn’t easy to determine how Microsoft’s embedded business — potentially relatively resistant to shifts in consumer confidence — impacted its bottom line. During yesterday afternoon’s one-hour conference call and Q&A, Liddell and his colleagues made no mention of Windows Mobile or any of the company’s other embedded operating systems.

Microsoft has five divisions: Client, Server and Tools, Business, Online Services, and Entertainment and Devices (EDD). The last of these, EDD, is responsible not only for Microsoft’s embedded operating systems — Windows Embedded Standard, Windows XP Embedded, Windows CE, and Windows Mobile, for example — but also for consumer products such as the Xbox 360 gaming console and Zune music player.

Microsoft EDD revenue for Q4 of FY2009
Source: Microsoft

According to Microsoft, EDD revenues decreased by 25 percent year-over-year, going from $1.59 billion in Q4 FY2008 to $1.19 billion in Q4 FY2009. Matters might have been worse if it weren’t for the fact that 1.2 million Xbox 360 consoles were sold, and that the “attach rate” for Xbox software went up 8.6 percent. Ominously, however, the company said “non-gaming revenue” declined 42 percent.

Meantime, desktop editions of Windows, such as Windows Vista, Windows XP, and the forthcoming Windows 7, are part of Microsoft’s Client division (below). Here, revenue — adjusted to take the free Windows 7 upgrade into account — was said to have decreased 22 percent year-over-year, to approximately $3.11 billion.

Microsoft Client revenue for Q4 of FY2009
Source: Microsoft

According to Microsoft, which cited a “weak business PC market,” sales of traditional laptops and desktops fell from 16 to 18 percent year over year. Once netbook shipments are taken into account, the overall decrease ranged from five to seven percent, the company added.

As Microsoft tacitly conceded, however, netbooks do little to boost the company’s bottom line: Because most of the devices cannot run Windows Vista, they ship with Windows XP ULCPC (ultra low cost PC), a loss-leader edition of Windows XP Home that reportedly nets Redmond just $15 per unit.

Asked to comment on Google’s announcement of a forthcoming Chrome OS for netbooks, Lidell said, “We’ve been fighting free OSes in the client area for quite some time, as you know. I would point to the general value that Windows has, especially Windows 7, which we think is going to be our best-ever operating system … We don’t see that significantly changing because of the Chrome OS coming out.”