The Windows Observer--Record Revenue Reported by Microsoft

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Volume 5, Number 4 -- January 30, 2008

Record Revenue Reported by Microsoft

Published: January 30, 2008

by Alex Woodie

Microsoft recorded the most revenue ever for a three month period last week. For its the second quarter, which ended December 31, Microsoft counted $16.37 billion in its coffers, exceeding the next most successful quarter by nearly $2 billon. The software giant credited the surge to strong holiday spending on Vista and Office 2007, explosive growth in Russia, Brazil, and other developing countries, as well as continued strong demand for its server products and business applications.

Despite the soft reception that Windows Vista received early last year, Microsoft has managed to keep the cash flowing into its oversize vaults. That's largely driven by the fact that sales of PCs did particularly well, growing 13 percent for the year and setting new sales records during the second half of 2007. Microsoft recorded a sale on each of these, whether or not that PC contained Windows XP or Windows Vista. (XP outsold Vista nearly two-to-one, by the way.)

The result was that Microsoft did tremendously well, reaching its highest sales ever, and trouncing the next best quarter--its third quarter of fiscal 2007, which ended March 31, 2007, and brought in $14.4 billion in revenues. On a year-over-year basis, revenues increased by 30 percent, operating profits jumped 87 percent to $6.5 billion, and diluted earnings increasing 92 percent to $0.50 per share.

Of course, one must take into account the "technology guarantee" that affected revenue and earnings a year ago. The guarantee, you will remember, was put into place when Microsoft delayed the launch of Windows Vista past the 2006 holiday buying season. Concerned that people would stop buying PCs, Microsoft put the guarantee in place to ensure XP buyers could move to Vista when it was ready. But Microsoft was forced to delay these earnings until later quarters, which had the effect of draining the year-ago figures and pumping up the more recent quarters.

Without the guarantee, Microsoft's year-over-year quarterly growth figures would still be good, just not quite as good. Without the deferral of $1.64 billion from the second to the third quarter of fiscal 2007, revenue, operating income and earnings per share growth would be 15 percent, 27 percent and 32 percent, respectively.

Microsoft's Client division, which sells the Windows client operating system, brought in about $1.8 billion more last quarter than a year ago, growing 68 percent from $2.6 billion in revenues to $4.3 billion. Nearly all of that growth is profit, as shown by the 83 percent increase in operating income, from about $1.8 billion to $3.4 billion. Without the impact of the technology guarantee, growth in the Client division revenue would have been a more modest 16 percent and operating income would have suffered accordingly.

The Server and Tools division, which sells the Windows Server, SQL Server, and Visual Studio products, brought in $3.28 billion, a 15 percent increase from a year ago. Microsoft was eager to point out that customers were continuing to invest long-term in Microsoft server and tools products, with "strong annuity license growth" and a 35 percent increase in sales of Windows Server Enterprise Edition, which it says is an indication of strong customer interest in its upcoming launch of server products. Operating income grew a steady 19 percent to about $1.2 billion for this division.

The Microsoft Business Division, which sells the Office suite, the Dynamics ERP and CRM lines, and the Exchange and SharePoint products, turned in another good quarter, with 37 percent revenue growth to $4.81 billion. Operating income exploded by nearly 50 percent, from about $2.2 billion to about $3.2 billion.

The Online Services business, which sells advertising space and controls the Windows Live product suite, grew revenues 38 percent to $860 million. Microsoft pointed out that $154 million of that came from aQuantive, the online advertising company that it bought for $6 billion last year. However, this division's loss increased from $118 million a year ago to $245 million last quarter.

The Entertainment and Devices division, which sells the Xbox gaming console and Zune MP3 player, eked out a 3 percent increase in revenue, from $2.9 billion to $3.0 billion. More importantly, however, this division swung a $357 million profit, compared to a $300 million loss a year ago.

"We are in the midst of another strong year with great momentum heading into calendar year 2008," declared Kevin Turner, Microsoft COO. "We continue to see healthy demand from both businesses and consumers in the United States and our growth in emerging markets is especially strong. Looking across Brazil, Russia, India, and China, our field revenue reached a combined growth rate over 65 percent this quarter. As we look ahead, our Windows Server 2008 launch, with our virtualization solution, will further our quest to bring exceptional value to our customers."

Microsoft is planning to launch Windows Server 2008, SQL Server 2008, and Visual Studio 2008 at a big event scheduled for February 27.