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Volume 2, Number 43 -- November 2, 2005

Microsoft Revenues Grow 6 Percent, Profit Soars to $3.1 Billion

by Alex Woodie

Led by a double-digit increase in its Windows Server and development tools business and stronger than expected back-to-school sales, Microsoft last week posted solid revenue growth and profit for the first quarter of its 2006 fiscal year, which ended September 30. Total revenue for the software giant rose 6 percent to $9.74 billion, while net income increased 24 percent to $3.14 billion. New ERP and CRM software sales were also up more than 20 percent, beating the overall enterprise software market.

Microsoft executives were upbeat about the company's results. "We had a good quarter and a good start to the year. We enjoyed healthy demand in our core platform software," Chris Liddell, Microsoft chief financial officer, said during a conference call last week. "We continue to see fiscal year 2006 as an excellent year, kicking off our next product cycle."

Normally, one would expect a slowdown in sales for a particular product as that product's replacement becomes available. However, that's not the case with SQL Server 2000, which saw a 15 percent increase in sales during the quarter, Liddell said. "This is an impressive result in front of the SQL Server 2005 launch next month," he said.

SQL Server 2005, codenamed "Yukon," was released to manufacturing by Microsoft last week, and will be officially unveiled next Monday during a launch event in San Francisco (see "SQL Server 2005 Released to Manufacturing".)

The rest of the Server and Tools business--the unit in which SQL Server sales are recorded--fared pretty well, too. This division reported a 13 percent overall increase in revenue, from about $2.2 billion during the first quarter of fiscal year 2005 to about $2.5 billion during the last quarter. This segment's operating profit increased a whopping 28 percent, from $699 million to $896 million, much of which could be attributed to those SQL Server 2000 sales.

Microsoft's Client business, which continues to be the company's most profitable business, benefited from a strong back-to-school sales season in August and September, particularly among laptop computers and the OEM versions of the Windows XP SP2 operating system those laptops invariably come with. Sales of the Media Center version of Windows--which enables a PC to function as a digital video recorder (DVR) without the monthly fees that companies like Tivo charge--were also strong, Liddell said. Overall Client revenues grew 7 percent to about $3.2 billion, while this business' operating profit also increased 7 percent, to about $2.6 billion.

Business continues to be somewhat flat in Information Worker, the unit that sells the Office productivity suite. Revenue increased by 4 percent to about $2.7 billion, while operating profit rose a scant 1.3 percent, from $1.9 billion to $1.93 billion. That's still an extremely healthy business that every other company on the face of the earth would kill to have, but the fact is it's just not growing like it used to, which has been a concern to Microsoft. The company expects that to change with the launch of Office 12 and Exchange 12 in 2006.

Microsoft Business Solutions, the unit that sells ERP and CRM software, was another bright spot for Microsoft last quarter. MBS revenue was up 16 percent to $181 million. If Microsoft had not farmed off a lot of the professional services to its business partners--which is its policy to strengthen relationships in this critical growth area for Microsoft--revenue would have been even higher. As it was, the company experienced a very strong 21 percent revenue increase on new license sales, and an 18 percent overall increase in software revenues, which includes maintenance revenue streams. MBS also narrowed its losses for the quarter from $31 million a year ago to $12 million last quarter, but it's doubtful the company is in too much of hurry to show a profit here. After all, MBS is a loss leader, and brings in lots of Windows Server, SQL Server, and client operating system revenues that are accounted for elsewhere.

Revenue in the Home and Entertainment division took a steep $109 million dive, undoubtedly due to the upcoming launch of the much-hyped Xbox 360 gaming console. The Mobile and Embedded Devices division saw a big jump in revenues, from $49 million to $74 million on strong sales of WindowsCE and Windows Mobile 5.0, Liddell said. MSN continues to be a concern for Microsoft, as revenues inch upwards at a glacial pace, and new market share wins go to Google and Yahoo.

While the first quarter marked a good start for Microsoft's fiscal year, executives issued revenue projections for the current quarter that were below analyst expectations. The company projects total revenue for the quarter ending December 31 to be in the neighborhood of $11.9 billion to $12 billion. That would represent a 10 to 11 percent increase on the $10.8 billion that the company posted for the second quarter of 2005, but still below analyst expectations.

Those are pretty good projections by most measures, but analysts are fickle creatures, and could have elected to punish the company's stock price. That didn't happen in large part because Microsoft also announced plans to accelerate its stock buyback plan. The plan now is to buy back $19 billion worth of stock by December 2006, roughly a twofold increase in its previous pace. The company's stock, which is traded on the Nasdaq National Market, increased about $1 on the news, and was trading just shy of $26 Tuesday.

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Editor: Alex Woodie
Contributing Editors: Dan Burger, Joe Hertvik, Shannon O'Donnell,
Timothy Prickett Morgan, Victor Rozek, Kevin Vandever, Hesh Wiener
Publisher and Advertising Director: Jenny Thomas
Advertising Sales Representative: Kim Reed
Contact the Editors: To contact anyone on the IT Jungle Team
Go to our contacts page and send us a message.


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