Guild Companies

The two powerhouses behind the Wintel duopoly, operation system, and application maker Microsoft and chip and chipset maker Intel, continue to do better than the class average in the IT market when it comes to bringing in sales and profits. Microsoft saw a big surge in revenue as companies opted into long-term services contracts in its first fiscal quarter ended September 30, and Intel is holding steady with modest revenue gains despite intense price pressure in its third quarter.

Microsoft said that sales rocketed up 26 percent in the fiscal third quarter to $7.75 billion, and the top brass at the company immediately went to work explaining that this growth rate was not sustainable over the long haul and that, in fact, revenue growth rates would be trending downward over the next couple of quarters. Although Microsoft won't come out and say it, the fact that its older Upgrade Advantage enterprise licensing schemes had expired on July 31, the first month of the quarter, was a big factor in the sales surge. Plenty of companies who were looking at higher software bills under the Software Assurance Licensing 6.0 agreements locked into the old schemes to avoid those price increases. Exactly how much of Microsoft's revenue comes in under these deals is unknown.

What Microsoft does say is that revenues from its Server Platforms were up 14 percent in the quarter to $1.59 billion. This category includes Windows server operating systems, various server middleware, Client Access Licenses for PCs that connect to those servers, developer tools, training, certification, Microsoft Press products, and enterprise service agreements. Microsoft said that server operating system licenses were up 17 percent (including CALs) as deployment of .NET Enterprise Servers (particularly the SQL Server database) and OEM licenses for Windows server editions grew. Services revenues for these products were up 8 percent compared to the third fiscal quarter last year. Developer tool sales were up 21 percent, driven by annuity licensing and Microsoft Developer Network fees. Training, certification, book, and other services sales declined by 18 percent in the quarter.

On the client side of the Microsoft house, revenues were up 33 percent to $2.85 billion, driven by the adoption of Windows XP (over 67 million shipped so far). Commercial editions of Windows client operating systems (as opposed to consumer versions) accounted for 63 percent of sales in the quarter, and these numbers again reflect the desire by corporate customers to upgrade to new Windows platforms while at the same time locking in the old Upgrade Advantage licensing. Microsoft said that client revenues were up because PC shipments grew modestly. Microsoft now breaks out its client applications into a new group it calls Information Worker, which accounted for $2.27 billion in sales in the quarter, up 26 percent, also driven by decent PC sales, upgrades, and the desire by some companies to get in under the wire on Upgrade Advantage. This Information Worker category includes Office, Project, Visio, and other applications. Microsoft's Business Solutions category, which includes the Great Plains and Navision suites, accounted for $106 million in sales. This is noise in Microsoft's data, honestly, but still makes Microsoft one of the top application vendors in the world.

When all the math was done and all the bills paid, Microsoft brought $2.7 billion to the bottom line (more than double the net earnings from last year's fiscal third quarter); the company increased its cash and short-term investment hoard to over $40 billion. Microsoft said that it was on track to hit around $8.6 billion in sales in its fiscal second quarter and that it expected fiscal 2003 revenues (for the year ending June 30, 2003) to be in the range of $32.2 billion to $32.6 billion.

Down the coast from Microsoft's Seattle headquarters, its main partner Intel was holding things together in Santa Clara. Intel reported third-quarter revenues of $6.5 billion, flat compared to last year and up 3 percent sequentially from the second quarter. Intel announced 18 new processors in the quarter based on .013 micron process technology--a truly astounding number that must be driving its hardware partners crazy with hardware certifications--and said that this has helped drive sales. Intel kept R&D and SG&A costs in the range of $1 billion each, and because it didn't have to amortize goodwill and other acquisition-related intangibles as it did this time last year, the company was able to bring $686 million to the bottom line instead of $106 million like it did in the third quarter of 2001. Increases in the Intel chip and wireless product businesses offset declines in the communications sector. Intel said that chip shipments were higher in the quarter than this time last year and motherboard shipments were flat.

Intel said that it expected fourth-quarter sales to be in the range of $6.5 billion to $6.9 billion, and said further that is will be able to shave capital equipment costs to $4.7 billion (down from an expected $5.2 billion) for the year by recycling some older equipment and driving down costs in ongoing plant construction projects. Like Microsoft, Intel has a bunch of money in the bank, with cash equivalents of nearly $11 billion on hand.