Server Sales Drive Record Revenues for Microsoft

Published: February 1, 2006

by Alex Woodie

Microsoft last week reported revenues of $11.84 billion for the quarter ended December 31, a 9 percent increase over its second quarter figures last year, and record high for the world's largest software company. The highlight of the quarter was Microsoft's Server and Tools segment, which grew revenues by 14 percent to $2.9 billion, while the company's ERP software division made a profit for the very first time.

Microsoft continues to milk the cash cow that is the Windows desktop operating system. Nothing in the industry comes close to the immense margins Microsoft reaps from its Windows desktop OS, which the company sells through its Client division, and which brought in nearly $3.5 billion in sales during the 92 days from October 1 through December 31--the end of a year that was surprisingly good for PC makers. For those of you interested in such trivia, that comes out to about $37.6 million per day from Windows desktop--a revenue stream that costs Microsoft only about $9 million per day. That's a hefty profit margin by anybody's books.

By comparison, Microsoft puts more than twice as much money into building and maintaining its Server and Tools revenue stream, and gets less in return. During those 92 days last quarter, the Server and Tools division accounted for an average of about $31.6 million per day in revenue, at a cost of about $19.6 million per day. That's pretty good work if you can get it, although those margins are nothing like Microsoft enjoys on the desktop. This is because Microsoft still enjoys a monopoly on the desktop, but is forced to compete in servers.

And, as demonstrated by Microsoft's Windows Server growth figures and third-party market analysis by the likes of IDC and Gartner, Microsoft is competing and winning on the server, too. Final market share figures for 2005 haven't been released by those analysts yet, but judging by Microsoft's 14 percent revenue growth in Server and Tools during Q2, the unit's 13 percent growth for Q1, and the most recent server shipment figures from the analysts groups, Windows Server's share of the market continues to experience healthy double-digit growth that is surpassed only by the upstart Linux.

The SQL Server database business, which enjoyed a 20 percent year-over-year revenue increase, was a particular standout for Microsoft during the quarter. While Microsoft didn't release the new version of SQL Server, dubbed SQL Server 2005, to manufacturing until mid-November, enough customers must have gotten their orders in to boost revenues for the quarter.

The third leg of Microsoft's revenue- and profit-generation triumvirate, Information Worker, enjoyed less stellar growth of 5 percent, to $2.98 billion, and a meager 1.5 percent increase in profit to $2.1 billion. Information Worker, which is where sales of Office are logged, is still the second largest group at Microsoft by revenue and by profit, although Server and Tools' revenue figures will probably pass Information Worker during the current quarter.

Microsoft Business Solutions, which is the business unit responsible for Microsoft's ERP and CRM software, logged $242 million in revenues for the quarter--a solid 17 percent increase--and came out $10 million in the black--the first time in the group's history it brought in more money than it spent. This is good news for Microsoft, as it seeks to grab more midmarket ERP market share with its newly rebranded "Microsoft Dynamics" initiative. Even if MBS lags industry giants Oracle and SAP in revenue, you can't discount the potentially huge effect that mindshare and Microsoft marketing initiatives can have on the ERP purchasing populace (see "AMR Sees 'Huge Surge' in ERP Spending, Most Likely at Microsoft").

Microsoft's Mobile and Embedded Devices division joined MBS in making a profit for the first time, but that's where the good news ends. Revenue and profit figures actually decreased at Microsoft's MSN division, and the Home and Entertainment division, which sells the Xbox gaming console, reported a $183 million revenue increase to about $1.5 billion; however, it wasn't enough to cover costs, and the unit reported a net loss of $293 million.

In terms of net income, the company as a whole brought in $3.65 billion in profit for the quarter, a 5 percent increase over the second quarter of fiscal 2005, and an increase of about 14 percent compared to the $3.14 billion in brought in during the first quarter of 2006. Diluted earnings per share for the second quarter were $0.34, which reflects a $108 million, or $.01 per share, in tax benefits.

While Microsoft recorded its highest quarterly revenues ever at $11.84 billion, it nevertheless failed to meet its own guidance of $11.9 to $12.0 billion. Despite the miss, investors drove up the value of the company's stock, which is traded on the NASDAQ National Market, to about $28 on Friday, near the company's 52-week high.