Good Times Roll for Microsoft Financially

Published: October 31, 2007

by Alex Woodie

Would somebody please remind Microsoft what year it is? The software giant hauled in the cash like it was 1999 during its most recent quarter, growing revenues by nearly 30 percent to nearly $14 billion, and increasing earnings per share by more than 25 percent, thereby beating Wall Street estimates and sending its stock climbing close to a six-year high.

For the three months ended September 30, Microsoft reported revenue of $13.7 billion, a 27 percent increase over the $10.8 billion it posted a year ago. Operating income grew more than 25 percent, from $4.5 billion to $5.9 billion, and earning per share of $.45 per share beat estimates by over a nickel.

"This fiscal year is off to an outstanding start with the fastest revenue growth of any first quarter since 1999," said Chris Liddell, chief financial officer at Microsoft.

Following the earnings release last week, Microsoft's stock, which is traded on the NASDAQ National Market, shot up by more than 10 percent in after-hours trading to around $36 per share, where it has remained. While it's nowhere close to its all-time high of about $59 per share, set in early 2000, Microsoft's stock is now trading at values not seen since the middle of 2001, and has now increased by more than 50 percent over the last 14 months.

Microsoft can credit a surge in PC sales by consumers around the world with the change. PC unit shipments in Asia and Europe rose more than 20 percent during the quarter, according to analyst reports, while worldwide sales increased by about 14 percent during the quarter.

Those strong PC sales buoyed the company's Client division, which sells the Windows Vista and Windows XP operating systems. The Client division grew revenues by 25 percent, from about $3.3 billion to about $4.1 billion. It was also, by far, the most profitable division, accounting for nearly $3.5 billion in operating income.

Other divisions were no slouches. Server and Tools posted a solid increase of 16 percent, to $2.9 billion, on strong sales of Windows Server and SQL Server. The Online Services business, which includes Windows Live, MSN, and its new aQuantive ad sales business, grew revenues a healthy 25 percent to $671 million. The Microsoft Business Division, which sells the Dynamics ERP suite as well as products like Exchange and SharePoint, grew revenues by 20 percent, to $4.1 billion. The Entertainment and Devices Division, which sells the popular Xbox 360 game console, practically doubled its revenue, ending up with $1.9 billion.

Looking forward, Microsoft expects to see revenues increase in the range of 10 to 13 percent (or 25 to 28 percent when taking into account the "technology guarantee" that gave PC buyers a year ago the option to upgrade to Vista when it became available).

Those Vista sales were a big concern three months ago, when Microsoft lowered its sales forecast for the new operating system. That adjustment came just after an analyst group raised Microsoft's ire by predicting that it could hit a bump in the road when Software Assurance customers elected not to renew their multi-year contracts. Customers were not happy with lengthening product roadmaps, and the fact that they often could buy products outright for less money than they were spending under their two- and three-year Software Assurance contracts.

The health of that annuity revenue stream can be measured by looking at Microsoft's unearned revenue. During the fourth quarter of fiscal 2007, Microsoft reported $12.6 billion in unearned revenue thanks to an anomalous 16 percent rise in Software Assurance bookings. As Microsoft predicted in July, that unearned revenue figured declined in the most recent quarter to $11.6 billion, a drop of about 8 percent.

Microsoft didn't specify the renewal rate of Software Assurance agreements for its first quarter, but it did say it was within the "historical" range. Bookings were up significantly too, so, at least for now, Microsoft's annuity revenue stream appears to be intact.

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