Microsoft First Quarter Revenues, Profit Up 11 Percent

Published: November 1, 2006

by Alex Woodie

Microsoft last week announced financial results for the first quarter of fiscal year 2007, which ended September 30. The software giant brought in $10.81 billion in total revenue, and enjoyed net income of $3.48 billion, both of which translate to 11 percent increases. It was a "very good start" to the fiscal year, according to Chris Liddell, the company's chief financial officer. The immediate future is less rosy, however, as a "technology guarantee" for Vista and Office 2007 will cost Microsoft a considerable amount during the next quarter.

Leading the way in Microsoft's first quarter was its Server & Tools division, which sells the Windows Server operating system, the SQL Server database management system, and the Visual Studio and .NET development tools. Revenue in Server & Tools amounted to $2.5 billion, a 17 percent increase over the first quarter of fiscal year 2006, and a 7 percent decrease sequentially from Microsoft's fourth quarter, when it brought in a record $2.69 billion. While all products in Server & Tools did well, SQL Server did the best, as its revenues increased 30 percent during the quarter. Operating income for the quarter rose 36 percent to $827 million.

Microsoft's Client division, which sells the Windows XP desktop operating system, continued to grow, albeit at a slow pace. During the quarter, revenues increased by 4 percent from the same quarter a year ago to $3.3 billion, while operating income was $2.64 billion, a 3 percent increase. Microsoft is eager to see any momentum in this, its largest segment by revenue, and this is why it decided last week to give free or dramatically discounted licenses for its upcoming Windows Vista operating system to people who purchase a computer with Windows XP over the holiday consumer buying season. However, that "technology guarantee," as Microsoft calls it, is also going to hurt Microsoft to the tune of $1.5 billion in lost revenues next quarter, although it says it will make it up in the third quarter.

The third leg of Microsoft's revenue and profit stool--the Microsoft Business Division, which sells the Office productivity suite as well as Microsoft Dynamics ERP--brought in $3.43 billion over the quarter, a 4 percent increase from the same period a year ago, but a 12 percent drop sequentially from the fourth quarter of fiscal 2006, when the division was separated into Information Worker and Microsoft Business Solutions divisions. Operating income rose less than one percent to $2.3 billion. The highlight of this quarter was a 19 percent year-over-year increase in customer billings for the Dynamics line, which indicates a healthy pipelines for Microsoft's ERP business. Big things are expected from this segment in the quarters to come as Office 2007 and Exchange 2007 get out of the gates. However, revenue and profit is expected to be down in the second quarter, as part of Microsoft's technology guarantee applies to Office 2007 upgrades, as well.

Microsoft's Online Services Business, which encompasses the MSN search, Hotmail e-mail, Messenger instant messenger, and Live application business areas, continued to have trouble getting going financially. This segment brought in $540 million, a 4 percent drop from the year-ago period, and a 7 percent drop sequentially. This unit swung from $68 million in operating income a year ago to a loss of $136 million, largely as a result of the cost of developing Live products and the fact that Microsoft hasn't found a feasible way to make money off them yet.

The Entertainment & Devices Division, which is a combination of the old Mobile and Embedded Devices division and Home and Entertainment division, brought in $1.03 billion for the quarter, a 70 percent increase from a year ago. A year ago, the Home and Entertainment division saw a big sag in revenues as the Xbox 360 video game system was about to be launched. Now, Microsoft is enjoying a good run of console sales, and banking on ramping up Xbox 360 sales to the 10 million mark by the end of the year. (It's currently sold about six million.) This unit accounted for an operating loss of $96 million, an improvement on the $173 million loss recorded for the first quarter of fiscal year 2006.

Liddell, the CFO, remained upbeat despite the wider losses in some divisions and the looming $1.5 billion hit next quarter. "The solid revenue results for the quarter were at the top end of our expectations and represent a very good start to the fiscal year," he said in a statement that accompanied the release of the financial figures.

Microsoft also tweaked its forecast for the rest of the year. The company now expects revenue for fiscal year 2007 to be in the range of $50 billion to $50.9 billion, up slightly from the $49.7 billion to $50.7 billion it was forecasting in July, with operating income somewhere between $19.1 billion and $19.5 billion, compared to a forecast last summer that the company would make $18.9 billion to $19.4 billion next year.

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