Server Product Sales Fuel Microsoft Revenue Gains

by Alex Woodie

Strong sales of Windows servers during the summer months helped drive Microsoft's software license revenue during its first fiscal quarter. The Server and Tools unit of Microsoft, which includes the Windows Server 2003, Exchange Server, and SQL Server products, had increased revenue of $355 million, or nearly 20 percent, to $2.26 billion for the quarter, ending September 30. The Windows client and productivity applications divisions also grew revenues, but it's the server software sales that stand out for this quarter.

Microsoft's total first quarter revenues for fiscal year 2005 increased by 12 percent, from $8.22 billion to $9.19 billion, compared with the same period last year. Operating expenses (which has been a point of concern for Microsoft throughout 2004) were about $5.1 billion, a negligible 1.4 percent increase from the $5.0 billion it spent in the first quarter a year ago. With expenses kept in check, profit increased nearly in lock-step with revenue, and Microsoft's net income for the quarter increased by about 11 percent from a year ago, from $2.6 billion to $2.9 billion. Earnings per share increased 3 cents, to $0.27, for the quarter.

As has been the case for years, three divisions of Microsoft--Servers and Tools, Client, and Information Worker--were responsible for the lion's share of the revenue and revenue gains. Together, these divisions accounted for $7.7 billion in revenue for the first quarter, or 86 percent of total revenues. Compared with the same period last year, these three divisions increased revenues by $835 million, or 12 percent. They are also the most profitable divisions of Microsoft (particularly Client and Information Worker) and accounted for nearly $5 billion in operating income last quarter.

While Microsoft enjoys a monopoly on the desktop, it must compete with Unix, Linux, and OS/400 in the data center of small and midsized businesses, which is why the increase in Server and Tools revenues is significant. Microsoft says that it benefited from an up-tick in server spending during July, August, and September, when overall server hardware shipments increased by 16 percent. The company says that Windows-based server shipments during that period increased by 18 percent, which fueled a 19 percent increase in Windows Server license units and contributed to growth in SQL Server, Exchange Server, and overall Client Access Licenses (CALs).

Eric Rudder, senior vice president of the Server and Tools division, hopes the first-quarter momentum will carry over into future quarters, when Microsoft ships new administrative tools for its Windows Server line. "The recent release of Microsoft Operations Manager 2005 and the upcoming release of Microsoft System Center 2005 are creating excitement in the market, as evidenced by the greater than 20 percent revenue growth this quarter in our management server business," Rudder stated in the announcement.

Chief Financial Officer John Connors said that Microsoft will strive to expand this winning strategy used in the Server and Tools, Client, and Information Worker divisions--keeping expenses down, while driving double-digit revenue growth--into the company's other divisions. "This quarter we had a very healthy commercial server and desktop business driving double digit revenue growth, and we expect to continue the trend of growing revenue faster than expenses as we work to make each of our businesses more efficient and profitable," he said.

Microsoft's other four divisions--Microsoft Business Solutions, MSN, Mobile and Embedded Devices, and Home and Entertainment--together grew revenues by 10 percent, or $129 million, to contribute $1.4 billion in revenue to the company. All of these four divisions grew revenue, and all of them either recorded income gains or narrowed their losses. The MSN division, which continues to be the only profitable division among the four, grew revenues by $49 million, or about 10 percent, to $491 million.

Microsoft Business Solutions, the company's ERP software division, lost less money ($41 million) last quarter than in the same quarter a year ago ($68 million), but it grew revenues by only 8.8 percent, to $160 million, which has to be a concern for Microsoft, which invested $2.4 billion to buy Great Plains and Navision, two of the four ERP lines it sells under Microsoft Business Solutions.