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July 19, 2007 6:46 PM

Microsoft Q4 2007 by the Numbers



A $1.06 billion charge for failing Xbox 360 consoles mitigated Microsoft's quarterly and year-end results. But fiscal 2007 revenue was a blowout, topping $50 billion.

The big news may be Microsoft's Business division, which surpassed Client revenues, in yet another sign that sales of Office 2007 have been stronger than those for Windows Vista. The Business division includes Dynamics and Office, while Client's main product is Windows.

Client revenue growth came in on the low side of Microsoft's April guidance, while Business revenue—19 percent year-over-year growth—exceeded Microsoft's guidance of 13 to 14 percent growth.

For the fourth quarter, Business revenue from consumer sales grew 15 percent year over year, or $127 million, while revenue from businesses grew 20 percent, or $601 million. For the fiscal year, Consumer sales increased 11 percent, or $371 million; business sales increased 11 percent, or $1.54 billion. Microsoft largely attributed Business division gains to Office 2007 System sales.

Fiscal 2007 Q4 Revenue

For Client, once again, PC shipment growth—by Microsoft estimates, 11 to 13 percent—exceeded OEM sales growth, which was 11 percent. OEM revenue increased 15 percent, or $424 million, in part because of Windows Vista Home Premium. Microsoft said the mix of Premium to Basic SKU sales rose 17 percent to 72 percent.

Based on a cursory look at the numbers, organic sales of Office are driving up Business division revenue, while Client benefits more from subtle price increases. OEMs pay more for Vista Premium than they did for XP Home and, during its end of life, XP Media Center. It's no surprise that OEMs chose Premium over the hugely defeatured Windows Basic. Microsoft's Client revenue also got a boost from a 10 percent head-count decrease.

Tallying up Fiscal 2007
For the fiscal 2007 fourth quarter, Microsoft revenue topped $13.37 billion, or a 13 percent year-over-year increase. Operating income was $3.989 billion and net income $3.035 billion, or 31 cents per share. This compares with $3.881 billion operating income, net income of $2.828 billion and 28 cents a share in the year-ago quarter, an 11 percent increase. If not for the Xbox charge, operating income would have topped $5 billion, with net income of $3.784 billion, or 39 cents per share.

For its fiscal year, Microsoft revenue increased 15 percent year over year to $51.12 billion. Operating income was $18.524 billion, with net income of $14.065 billion, or $1.42 a share. A year earlier, Microsoft's operating income topped $16.4 billion, with net income of $12.599 billion, or $1.20 a share.

Fiscal 2007 Q4 Income

In April, Microsoft forecast fourth-quarter revenue between $13.1 billion and $13.4 billion, up 11 percent to 14 percent. Microsoft expected income between $5 billion and $5.2 billion, up 28 percent year over year. Earnings-per-share estimated were 37 cents to 39 cents.

For the segments, Microsoft's fiscal fourth-quarter growth forecasts were:

  • Client, 14-15 percent
  • Server & Tools, 16-17 percent
  • Business, 13-14 percent
  • Online Services, 10-15 percent
  • Entertainment & Devices, minus 2 percent

In April, Microsoft projected fiscal 2007 revenue between $50.9 billion and $51.2 billion, with operating income between $19.5 billion to $19.7 billion. Expected earnings-per-share estimates were $1.48 to $1.50.

Microsoft's revenue mix changed little. For the quarter:

  • Multiyear license contracts: 40 percent
  • OEM: 30 percent
  • License only: 15 percent
  • Rest of business: 15 percent

Microsoft's unearned revenue balance was $12.6 billion at the end of fiscal 2007, with contracted but not billed balance exceeding $10 billion. Microsoft continues to see unearned revenue increases, mainly from volume licensing contracts. During its earnings conference call today, the company indicated that Enterprise Agreement renewals were at the high end of the traditional renewal rate of 66 percent to 75 percent.

Microsoft Fiscal 2007 Revenue

Last week, a Forrester Research report concluded that many enterprises would not renew Software Assurance contracts. With EA renewals up and many contracts up for renewal, it's too soon to assess impact on Software Assurance, which is attached to Open, Open Value and Select volume licensing contracts.

That said, there is an interesting increase in Client volume licensing, with associated unearned balance revenue growing 25 percent. Before Vista, the bulk of Windows revenue came from OEMs—typically 80 percent or more. Increase in volume licensing would be a significant shift and it would boost recurring revenue. During today's conference call, Chris Liddell, Microsoft's chief financial officer, said unearned revenue contributed "three points" to Client revenue growth, which is indicative of the trend.

Looking ahead to fiscal 2008
April's guidance for fiscal 2008: Revenue between $56.5 billion and $57.5 billion, with operating income between $22 billion to $22.5 billion. Expected earnings-per-share estimates: $1.68 to $1.72.

Today, Microsoft raised fiscal 2008 guidance, with revenue projections in the $56.8 billion and $57.8 billion range, operating income between $22.2 billion and $22.7 billion, and $1.69 to $1.73 earnings per share. Unearned revenue increase is expected to be 7 to 10 percent.

For the fiscal first quarter, the revenue estimate is $12.4 billion to $12.6 billion, with operating income of $5 billion to $5.2 billion, or 38 cents to 40 cents. Microsoft forecast a sequential decrease in unearned revenue.

For the segments, Microsoft's fiscal first-quarter growth forecasts are:

  • Client, 15-16 percent
  • Server & Tools, 11-12 percent
  • Business, 14-15 percent
  • Online Services, 10-11 percent
  • Entertainment & Devices, 30-40 percent

Two related trends are worth noting. Microsoft expects PC growth to be between 13 and 16 percent during its fiscal first quarter. For the fiscal year, it expects growth of 7 to 10 percent. Liddell said for PC shipments expect to see "emerging markets outpacing mature markets."

Microsoft Fiscal 2007 Income

Financial analysts asked more about Premium mix than anything else during today's earnings conference call. The concern is that Business Premium mix affects Vista Enterprise higher costs and potential volume licensing increases and therefore unearned revenue. Enterprise can only be obtained through volume licensing, although some OEMs have programs for preloading customers' software images.

The aforementioned increase in volume licensing contracts more likely results from Microsoft's change in Vista licensing than a dramatic change in enterprise buying habits. More businesses going for most-costly Vista Enterprise also would also likely boost Client revenues. When would depend on businesses ramping up deployments.

Related Posts:

  • Office 2007: Don't Wait for Vista, Microsoft Watch, July 19, 2007
  • Xbox: Moore or Less, Microsoft Watch, July 18, 2007
  • Questioning Office 2007 Priorities, Microsoft Watch, July 17, 2007
  • Microsoft Clubs Its Way to Search Gains, Microsoft Watch, July 16, 2007
  • Why This Services Stage?, Microsoft Watch, July 11, 2007
  • It's Official: An Unofficial Delay, Microsoft Watch, July 10, 2007
  • Microsoft's Licensing Response, Microsoft Watch, July 9, 2007
  • Software Assurance Storm Warning, Microsoft Watch, July 9, 2007
  • X Marks the Box, Microsoft Watch, July 6, 2007
  • Live Lives, but How Well?, Microsoft Watch, June 27, 2007
  • Google This!, Microsoft Watch, June 25, 2007
  • Why Microsoft Wrote aQuantive a Big Check, Microsoft Watch, May 18, 2007
  • Microsoft Q3 by the Numbers, Microsoft Watch, April 26, 2007
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    Comments (11)

    Ed T :

    It's obvious what stands out among the divisions and what needs to get done. Ballmer should immediately pump more money into MSN and Entertainment & Devices. Only then will MSFT shareholders appreciate Ballmer's skillful management team as they pull together to rescue these fledgling operations. Their new motto in Redmond is "We don't try to put out the fires anymore, we just pi$$ on the tallest flames!" Now that's esprit de corps money (and stock options) just can't buy!

    Confused :

    Microsoft's Client revenue also got a boost from a 10 percent head-count decrease??? How does that work? Revenue is sales which wont go up with less people...

    Microsoft should acquire Facebook and Yahoo to bolster up their Live Services. Also, fix search to make it work better in Live Services such as Spaces and Hotmail.

    Microsoft should acquire Facebook and Yahoo to bolster up their Live Services. Also, fix search to make it work better in Live Services such as Spaces and Hotmail.

    B.Clanton :

    Imagination is the same function that works in the human brain that responds to ideas about 'pagan' cannibalism. We try to reign it in to capture and tame its creative germerative powers and yet it always tends toward the worst of its nature.

    It's the kind of stuff that makes you ask yourself, 'am I crazy?'

    We now have two companies rumored to be engaging in an activity that is "possible" with AJAX and likewise clones in various languages but, in actuality, could be done much more thoroughly and much more realtime with patent 521 with some 744 on top to make the addition of services and consumption fed to the 521 node global and easy.

    The question is; are THEY crazy?

    Let's say microsoft and apple are using AJAX across this active-synch gap between the Microsoft proprietary port and the Apple proprietary port. Are they able to link active-synch to OTHERS? I don't see why not, but you're now complicating by tying the MSFT/APPL node to somebody else like YHOO's proprietary port.

    Obviously, at some point you're going to have to do this in XML and you're running active-synch across http. So, would you use XMLhttpRequest? "Not I." said the little red rooster.

    First, exchange has to be tranactional in nature or you'll never know where your data went or if it even made it there. If the exchange doesn't work, how will you get the data back to where it was to try again?

    Second, it would be nice to be able to govern what happens in the exchange so you can apply risk analysis and best practices guidelines to your transaction process.

    third, it would nice to keep an audit trail to go back and check exactly what data was exchanged at what date and time. And what happened (you know, store the deterministic state so you can re-run the exchange scenario).

    fourth, if you were REALLY cool, you could use the audit trail to go backward in time to return the machines to the original state at any particular date and time.

    Do that with AJAX? OK. We'll time you. On your mark, get set, go. You lose.

    I mean AJAX uses XML to some degree to accomplish this, but, if that's true, I don't see any real advancements in AJAX between what happened last year and earlier this year that would account for technological delays in critical virtualization features by both Microsoft and Apple at various times this past year.

    No, I would say the exchange-synch has the ability to tranasct deterministically, provide governance imposition, embedded audit capabilities at the least to make it reliable and trustworthy between multiple vendor platforms.

    Sure, you could build something like that for each proprietor using their own stuff or something you give them, but, WHAT would you give them? If Microsoft had this secret stuff all along, why is their first order of business giving Apple access to exhanged data between competing machines? Why would you not have used this capability to interconnect YOUR OWN? Maybe that's what happened when MSFT annoucned their Business Office applications could interconnect, so, now MSFT and APPL are read to stand against Google in the Office front.

    This happens and We're crazy?

    Let me ask you a question:

    Would you trust your business to the result of your dearest friend's lawyer's assertion they will win the eventual court case with information your friend could have used years ago and made billions of dollars with if only your best friend's lawyer would have let your best friend?

    No? Where's your loyalty, dude and dudette?

    How about if it was your worst enemy? No?

    Then what are Apple and Microsoft doing this for?


    chips b malroy :

    It is obvious that MS knows how to extract the maximum amount from its users. Clearly their revenue base has increased. However, MS is basically a one trick pony. Without Windows as the dominant OS on the desktop of home computers, even MS Office would start to lose it position. Vista has a cloudy future with both the free Linux and non-free Apple systems competing with it long term.

    Therefore, its important for MS to branch out, ventures like the XBox360, MSN Live (whatever its called this week) although not making money now, have the potential to eventually do so. The Zune however, is a complete DRM failure, of which MS has learned nothing. They should just drop the Zune and move on. MS, as a company,is not going away, not with a cash reserve of that size.

    But because MS profit went up, this is not a sign of the overall health of the company long term. Most of the MS money comes from the sales of Office, but that is dependent on the operating system that is installed. If users start to move to Apple or Linux, there will be generally lower sales of MS Office. This will be the true test of the health of the MS company long term, when they start to lose it.


    Bruce :

    "If users start to move to Apple or Linux, there will be generally lower sales of MS Office."

    Last time I checked, Office existed on the Mac.

    And Lat time I checked, this is the 10th or 11th "Year of Linux" ... and it is still less than 1% of desktop users.

    evan :

    Chips,
    'Most of the MS money comes from the sales of Office, but that is dependent on the operating system that is installed. If users start to move to Apple or Linux...'

    Even if this happen, which I don't see at least for another decade or so, office is available for the Mac. How long do you think it will take Microsoft to have an Office version for Linux? My guess, they already have it, but choose not sell it.

    chips b malroy :

    Evans;
    We usually don't agree on much, but I do agree that when Linux overtakes Windows, "then we will see a MS Office for Linux." However, it should be pointed out that since there is not a MS Office for Linux, that Linux distros usually (almost always) include either OpenOffice or KOffice on their CD's. And as MS knowns, the default program already installed, is the most likely one to be used. Also, its nice to see pro-ms people admitt that Linux could become the dominate OS. But then, even Bill Gates has said something like that in the past.

    Bruce;
    You are correct that MS has made a native Mac MS Office. However, MS has decided not to port Office 2007 to the Mac OS X. Remember one thing about the Apple, MS owns 25% of its stock.

    chips b malroy :

    Bruce:
    I would also point out that your 1% figure is open to debate. Just depends on who's stats you use. Have seen it as high as 3.6% on some sites. Then again, have seen Vista with site hits as low as 0.01% on some of the counters, and we both know that is wrong. Since Linux is not generally sold to desktop users, but rather given away, its very hard to know the percentage. Another point is that Linux users, may not surf the same sites that windows users tend to, as in what Linux user needs to fix their registry? Or visit a site that will tell them how to do that. So, the stats for online hits can be slanted.

    Another fact is that many Linux users in foreign countries may not be able to afford internet service at all. Also, I would not be surprized if MS was behind a few of the web counter sites, sort of like their "Get the facts sites."

    While the Mac is gaining percentage in the USA and some in the EU, its a niche computer, as it costs more. It could change if Apple decides to market it differently, or license the Mac OS X to Dell. Dell was asking them to do so. So really, in the long run, Linux is a far greater threat to MS than is Apple.

    Linux is gaining market share at this time. It has vastly improved in the last 2 years (at least some distros) in terms of being easy to use. That said, Vista is the best thing that ever happened to Linux. One measure of Linux adoption would be the amount of new users in the community forums, as shown with this link for Ubuntu;
    http://ubuntuforums.org/showthread.php?t=505228

    Ubuntu is ok, but not my GNU/Linux distro of choice. The point being almost all the linux distros community forums are showing an big increase in new members.


    Bruce :

    "Remember one thing about the Apple, MS owns 25% of its stock"

    What???

    Microsoft bought 150 million in stock options. A miniscule portion of Apples stock.

    As for your claim that Linux is over 1% ... your math is just as wonky as your Apple claim.

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