Parsing Microsoft's financials: Office shines, online services losing money

Parsing Microsoft's financials: Office shines, online services losing money

Summary: The revenue and earnings Microsoft has deferred to the next quarter due to Vista technology guarantees would be a helluva quarter at most places. Microsoft already has deferred of $1.

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TOPICS: Microsoft
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The revenue and earnings Microsoft has deferred to the next quarter due to Vista technology guarantees would be a helluva quarter at most places.

Microsoft already has deferred of $1.64 billion of revenue and $1.13 billion of net income, or 11 cents a share, from the second quarter ending Dec. 31 to the third fiscal quarter ending March 30. That's not a bad sum to have banked already. The deferrals are "due primarily to the technology guarantee programs for Vista and Office."

Microsoft blew away expectations with fiscal second quarter net income of $2.63 billion, or 26 cents a share, on revenue of $12.54 billion. According to Thomson Financial, Wall Street was expecting earnings of 23 cents a share on revenue of $12.09 billion. The outlook is also strong with Microsoft projecting revenue of $13.7 billion to $14 billion and earnings per share to be 45 cents a share to 46 cents a share. That guidance is in line with expectations.

However, those big overarching financials only tell part of the Microsoft story. To really get a feel for things you have to read between the numbers. A few nuggets that jump out from the earnings statement and Microsoft investor Power Point:

--The year ago launches of Xbox 360, Microsoft SQL Server 2005, Visual Studio 2005 and Microsoft Dynamics CRM 3.0. have contributed more than $1 billion in revenue growth.

--Microsoft spent $1.64 billion on research and development for the three months ending Dec. 31. That's up from the $1.6 billion spent in the same quarter a year ago. For the six months ending Dec. 31, Microsoft spent $3.4 billion on R&D compared to $3.1 billion for the same period a year ago.

--Total cash and short term investments as of Dec. 31 totaled $28.87 billion.

--Microsoft said its PC growth estimate for the fiscal second quarter is 8 to 10 percent.

--In the second fiscal quarter, the entertainment and devices division (led by Xbox) and the online services business (led by MSN) continue to lose money. The entertainment and devices unit had an operating loss of $289 million on revenue of $2.96 billion. Online services had an operating loss of $155 million on revenue of $624 million.

--Microsoft's business division (Office, Great Plains and CRM) is the biggest unit in terms of revenue for the company. It had revenue of $3.5 billion and an operating profit of $2.16 billion. Server and tools was second with revenue of $2.8 billion and an operating profit of $1.88 billion. Client came in third, but that'll change next quarter with Vista.

--Company's billing mix is 30 percent to OEM; 25 percent multi-year licensing deals and 20 percent straight licensing.

--SQL Server revenue growth topped 30 percent in the second quarter compared to a year ago.

--Advertising revenue was up 20 percent. There were 268 million Hotmail accounts and 263 million Messenger accounts.

--Dynamics customer billings were up 19 percent.

--Microsoft has sold 10.4 million Xbox 360 consoles so far. Gears of War sold more than 2.7 million units.

--Licenses for Windows Mobile phones up 90 percent from a year ago.

--Microsoft is projecting PC market revenue growth of 9 percent to 11 percent for the fiscal third quarter. Server and tools growth of 16 percent to 17 percent, client (driven obviously by Vista) growth of 54 percent to 56 percent; online services growth of 4 percent to 10 percent; Microsoft Business Division (Office, Great Plains and CRM) growth of 27 percent to 28 percent; and entertainment and devices division is expected to show a revenue decline of 15 percent to 25 percent.

Topic: Microsoft

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11 comments
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  • Who was it recommended open-sourcing Microsoft's software...

    ... to increase profitability? This report makes available some good information he can use to support his case.

    I look forward to the detailed argument.
    Anton Philidor
    • No case for open sourcing windows or Office

      It's the same story, windows and Office drive all of MS profits. It would be suicidal
      to open source these products.

      I believe the case by Mary was to open source some other products. We can see
      that it would have a negligible impact on MS profitability as they continue to fail
      growing significant profits from any other source.

      The lesson remains the same, if competitors want to cut off MS profits attack the
      WIN32 monopoly (via WINE project).
      Richard Flude
      • No there's not.

        ..I believe the case by Mary was to open source some other products....

        Yes. I believe SQL server was mentioned in Mary's article.
        This is what this article said about SQL server:

        ?SQL Server revenue growth topped 30 percent in the second quarter compared to a year ago.

        Maybe scratch that off the list too.

        Keep up the fud work Richard.

        Joe
        seosamh_z
        • Problem understanding even the basics

          "Maybe scratch that off the list too."

          What was the profit generated by this product? What was the profit's contribution to
          total MS profit?

          Sadly the fanboys don't have even a basic ability to comprehend what's written. Keep
          up the good work;-)
          Richard Flude
  • As expected,

    Microsoft's revenues exceeded expectations.

    -- pretty much the same headline that they've had for quarterly earnings for the last 20 years.
    Yagotta B. Kidding
    • LOL

      Yes they don't call em M$ for nothing
      Larry Dignan
  • Pretty easy for a criminal organization to make bank.

    What's so sad is they get to keep on keeping on. No punishment for the wicked I guess :-(
    nomorems
    • What does Apple have to do with it?

      [i]Pretty easy for a criminal organization to make bank.
      What's so sad is they get to keep on keeping on. No punishment for the wicked I guess[/i]

      Can you please stay on topic? This article is about MS, not Apple.

      http://news.zdnet.com/2100-1040_22-6150921.html

      http://www.masternewmedia.org/news/2006/04/05/mac_security_the_evil_drm.htm
      http://www.theage.com.au/news/mobiles--handhelds/apple-crunches-websites-over-iphone-skins/2007/01/15/1168709656280.html
      http://gizmodo.com/gadgets/laptops/thermal-greasy-apple-sics-lawyers-on-something-awful-171394.php
      http://news.zdnet.com/2100-11153_22-6152769.html
      NonZealot
    • Hey, your Mom called

      Get home now. You are off your med schedule again. You know how dangerous not taking your anti-psychotics is and your 8th grade principal is threatening to hold you back again if you keep missing school.
      xuniL_z
  • Memo to Steve Gillmor: Office isn't dead

    Office isn't dead, Office isn't even sleeping!

    Maybe it should be, but at this stage Office is making such a big pile of cash for
    Microsoft they don't know what to do with it all.
    mikataur
  • but I don't know if Microsoft have a good portfolio for the future

    I use windows and office, and visual studio 2003/2005.

    It seems to me that Visual Studio 2005 is a retrograde step,
    and in fact, .Net2 is so slow, it's laughable.

    I really can't accomodate another GUI change for Office 2007.
    And I found the release candidate Vista was not a great product.
    XP SP2 is OK, but Vista I'm really not sure about. It runs too slow for me on hardware it should be okay on, and the continuous warning dialog boxes get to me. Also the price, and for what? I can't see a lot of extra value in it.

    Personally, I think that Windows has been going downhill since NT4 : things just get more and more difficult to do, and slower.
    And Office has been going downhill from Word 2.0.
    Word 2.0 was amazing (and all other related packages).
    So light and functional. Then the next version was called Word 6.0 and ran like molasses, had a worse user interface.

    Personally, I think i'd like an Xbox 360, but (1) the games would have to be more varied and better than for Xbox1. You can't live on halo2 forever, it isn't good enough. I moved to the PS2 to get a better library.
    (2) the games are too darn expensive.

    I like the idea of IPTV through Xbox360, but I was put off by (1) the initial unreliability and short warranty reports.
    (2) the fact I never saw one turned on in a shop. (relates to 1 maybe).
    (3) the reports that it has a lot of fan noise.
    (4) MSN Music Club was a disaster. iTunes has the market for content, so maybe it will take Microsoft some time to get a good catalog. Apple TV might be a better bet. (quiet, good library, possibly more reliable).
    stevey_d