Microsoft's first quarter: Outlook light; Recession assumed; Office shines; Online doesn't

Microsoft's first quarter: Outlook light; Recession assumed; Office shines; Online doesn't

Summary: Microsoft on Thursday handily topped its revenue targets and slid by Wall Street estimates with solid fiscal first quarter results, but cut its outlook for the December quarter. CFO Chris Liddell noted on a conference call that business "clearly weakened" at the end of the third quarter and carried over into October.

SHARE:

Microsoft on Thursday handily topped its revenue targets and slid by Wall Street estimates with solid fiscal first quarter results, but cut its outlook for the December quarter. CFO Chris Liddell noted on a conference call that business "clearly weakened" at the end of the third quarter and carried over into October.

For its first quarter ending Sept. 30 (statement and presentation), Microsoft reported net income of $4.37 billion, or 48 cents a share, on revenue of $15.06 billion. According to Thomson Reuters, Wall Street expected earnings of 47 cents a share on revenue of $14.78 billion.

However, Microsoft did cut its earnings targets for the December quarter, but not by enough to spook investors, which took shares a bit higher after hours. Liddell said Microsoft sees a "mild to deep recession." Meanwhile, the credit crunch is curbing  software spending.

Microsoft projected revenue in the fiscal second quarter to be between $17.3 billion to $17.8 billion compared to Wall Street estimates of $17.98 billion. Earnings per share are expected to be between 51 and 53 cents a share compared to Wall Street estimates of 55 cents a share. For 2009, Microsoft said revenue will be between $64.9 billion and $66.4 billion (estimate $66.5 billion) with earnings of $2 a share to $2.10 a share (estimate $2.10).

msft4.png

The outlook wasn't perfect, but it was close enough--for now. However, Liddell didn't sound an optimistic note about the immediate future. "The environment clearly weakened in the third quarter," said Liddell, who said that Microsoft's previous assumption that the economy would improve in its fiscal second half isn't likely to play out.

msft.png

In a statement, Microsoft execs made two points:

  • The company's software can be used to cut your IT budget: Kevin Turner, chief operating officer, said: "Microsoft is uniquely positioned to help our customers save money through supplier consolidation, increased productivity, and a low total cost of ownership through the depth and breadth of our product portfolio and solutions."
  • And that Microsoft is well positioned. Liddell said: "In a challenging economic environment, the first-quarter results exhibit the strength and diversity of our business model."

Although some folks will debate that first point, there's no question that Microsoft's model is a cash cow (except for that online unit of course).

msft1.png

Key conference call points:

  • PC growth in the quarter was 10 percent to 12 percent. Most of that was netbooks, but officials said it's unclear whether these smaller devices are taking share away from traditional laptops.
  • Microsoft reckons it can grow at a high single-digit to low double-digit clip even in a slowdown. But the projections for the second half of the year are uncertain (potentially guesses).
  • Microsoft is pulling back on spending in lower priority areas. Liddell said Microsoft wants to be in a position to "dial up or down" based on the current economic environment.
  • Emerging market demand (China and elsewhere) remains in tact.
  • Netbooks could be disruptive to client margins--at least in terms of forecasting. It's unclear how Netbooks will impact Microsoft's licensing, but a lot of them run on Linux or stripped down XP.

By the numbers:

  • Microsoft's online services business continues to lose dough. For the fiscal first quarter, Microsoft's online unit lost $480 million on revenue of $770 million. A year ago, the online unit lost $267 million on revenue of $671 million.

msft3.png

  • Client revenue (Vista, XP et. al.) had an operating profit of $3.26 billion on revenue of $4.22 billion, roughly flat with a year ago.
  • Server and tools delivered operating income of $1.15 billion on revenue of $3.4 billion.
  • Microsoft's business unit (Office) had operating income of $3.3 billion on revenue of $4.95 billion. In the same quarter a year ago, the business unit had operating income of $2.7 billion on revenue of $4.1 billion. That performance reinforces what Microsoft execs have been saying: Office 2007 is a juggernaut.

msft2.png

  • The entertainment and device division (Xbox) had operating income of $178 million on revenue of $1.81 billion. Sales were down from a year ago but profits were up.
  • Research and development spending in the first quarter was up 24 percent from a year ago. Sales and marketing expenses were up 13 percent in the quarter with general and administrative costs up 24 percent.
  • Microsoft ended the quarter with $20.7 billion in cash, equivalents and short-term investments.

And here's the outlook for those aforementioned units:

msft5.png

Topics: Microsoft, Banking, Enterprise Software

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

20 comments
Log in or register to join the discussion
  • Moo!

    :-)
    P. Douglas
  • Not true

    <i>Microsoft???s business unit (Office) had operating income of $3.3 billion on revenue of $4.95 billion. In the same quarter a year ago, the business unit had operating income of $2.7 billion on revenue of $4.1 billion. That performance reinforces what Microsoft execs have been saying: Office 2007 is a juggernaut.</i>


    I read right HERE in ZDNet talkbacks that Office 2007 was an absolute DOG in sales (not "will be", but WAS) and the next earnings would reflect the horrible product that it is.

    I would tend to believe my trustworthy netizens more than some paid MS shill that reads off an MS-authored transcript. They're trying to pull a fast one on us to make us believe that Office 2007 sales are actually skyrocketing! As if! Due to the poor design of Office 2007, these numbers are impossible. (I've never even HEARD of this guy, anyway!)
    KTLA
    • Please take your meds...

      ...before posting in future.
      Sleeper Service
  • that shows how much M$ pillages the consumer.

    But change is comming!
    Linux & open Office will rule.
    Linux Geek
    • If you say it's going to snow...

      long enough, your prediction will come true. According to you, MS has been on its last gasp for the past 3 years.
      hickum
      • Quite so.

        After saying that customers don't like Office 2007 and OO would rule it seems that the ABM crew got that completely and utterly wrong and, frankly, not for the first time.

        No-one outside techies cares about Linux as a desktop solution. Sad but true.
        Sleeper Service
      • ...and will be saying the same thing 5 years from now - nt

        nt
        TheBottomLineIsAllThatMatters
  • Do something about it

    Since you know MS is lying on their official quarterly financial statements, why not sue them? You'd rake in a huge fee on behalf of the shareholders for uncovering this fraud.

    The SEC might even give you a fee for uncovering this gross deception.
    hickum
  • Interesting spin

    I'm not sure what report the author read. You can read it
    yourself here:

    http://www.microsoft.com/msft/earnings/FY09/earn_rel_q
    1_09.mspx

    Operating Income (Loss) 2008 2007

    Client $3,267 $3,388
    Server and Tools 1,151 959
    Online Services Business (480) (267)
    Microsoft Business Division 3,311 2,700
    Entertainment and Devices Division 178 167
    Corporate-level activity (1,428) (1,098)
    Consolidated $5,999 $5,849


    Near flat income growth in a market which grew 10+% last
    year. Same products contributing. Not sure the extra R&D
    will make a difference when the company can't produce
    products with a USD2 billion spend per quarter.

    Nice to have built a monopoly though, eases the pain;-)
    Richard Flude
    • Um not quite... but nice try on your own spin

      You map revenue growth to market growth, not income growth which is impacted by acquistisions, investments, etc...
      Johnny Vegas
      • Growing revenue without profit

        "You map revenue growth to market growth..."

        You don't have to, in fact a very shallow measurement. MS
        is getting back next to nothing for every dollar in
        additional expenditure, doesn't that tell you something?

        In a growing market MS profitability is going backwards
        with software (marginal cost near zero).

        No problems here. I wonder what will happen in a declining
        market;-)
        Richard Flude
        • Two words for you...

          'Product' and 'mix'.
          Sleeper Service
    • Nice try Richard, but your record still stands:

      You can still fool none of the people all of the time... ;)
      AllKnowingAllSeeing
  • "Microsoft's cash cow keeps humming ..."

    Humming is tolerable, but bursting into song would offend.
    Anton Philidor
  • Looks like zealots would have nightmares after this...

    Even after all those efforts at trying to put MS down, OSS is still left with scraps. Looks like "2008: Year of Linux" is another hollow promise like it has been for several years now.
    transposeIT
    • Ouch! - nt

      nt
      TheBottomLineIsAllThatMatters
    • We heard the same thing from Enron

      Their revenues were booming, quarter after quarter. It was all one big cash fest until the bottom fell out.

      All this shows is how much cash you waste on Windows products.
      Chad_z
      • Yeah...except MSFT is actually making real money

        There's no comparison. The bottom fell out of Eron's financial statements b/c they were playing games with their financial reporting. Love 'em or hate 'em, any reasonable person knows that Microsoft is actually very conservative in how they report earnings and forcast. Some argue that they're overly conservative. The bottom line (no pun intended) is that the company continues to generate huge amounts of cash and income and there is no end in sight. Heck, they GREW as much last year as almost any other software company in the world genearates in total.
        marksashton
      • Nice!

        The anti-MS camp has hung their hopes on the theory that MS MUST be Enron'ing the books.

        Hope there's a plan B that no one's seen yet, or it's looking pretty good for MS!
        KTLA
  • Is it true Apple has more cash than Microsoft?

    Thought I saw cash on hand as $20.7B for Microsoft, $24.5B for Apple...

    When did that turnaround occur? I thought Microsoft was richest company.

    .
    Basic Logic