Microsoft News Tracker

Here’s a look at the breakout of Microsoft’s 1Q FY07 earnings report supplemented by information from the 10-Q filing to see what it says about the various component businesses. The full numbers are reproduced below following some brief commentary. This kind of look is now rather less enlightening than it used to be since Microsoft has started reporting results for its new 5 division arrangement instead of the previous 7 business segments.

Cash cows:

Client and Business (mostly Office) snoozed through the quarter with  modest revenue increases eaten by greater headcount for their big stories of next year, Vista and Office 2007 respectively. Server and Tools once again shone - too bad they only seem to get the buzz at earnings time. In particular, SQL Server had 30% revenue growth.

The Mavericks:

Online Services revenues continued to decrease as MSN sheds ISP subscribers and the 5% increase in display advertising sales wasn’t enough to make up for it and the decline in search advertising revenues. Add in a 43% increase in headcount expenses to build the new Live and MSN properties and income went way in the tank.

Then there’s Entertainment and Devices where the results are disproportionately those of the Xbox 360 and associated Xbox and PC games which together accounted for $319 million of the revenue increase from a year ago when the Xbox 360 wasn’t yet shipping. Doesn’t seem like that big a blip does it? In any case, 900,000 Xbox 360s were sold during the quarter and someone must be doing good since the E&D loss was nearly halved to $96 million despite a reported increase of $268 million in expenses for the Xbox, games, and Zune.

The Oddities:

You know it’s a slow quarter when 61% of the profit increase comes from reductions in “Corporate-level Activity.” Of course we’re talking Microsoft and this turned out to be mostly a reduction in legal expenses partially offset by increased corporate headcount.

The Microsoft earnings results for the first quarter of their fiscal year 2007 are in:

Microsoft Corp. today announced first quarter revenue of $10.81 billion for the period ended September 30, 2006, an 11% increase over the same quarter of the prior year. Operating income for the quarter was $4.47 billion, an 11% increase compared with $4.05 billion in the prior year period. Net income and diluted earnings per share for the first quarter were $3.48 billion and $0.35 per share. For the same quarter of the previous year, net income and diluted earnings per share were $3.14 billion and $0.29, including a $0.02 per share charge for certain legal charges.

This neatly exceeded the analyst consensus of earnings of $0.31 per share on revenue estimates ranging from $9.74 billion to $10.75 billion. The big star was once again Server and Tools, most particularly SQL Server. You know, the software business is so good, maybe Microsoft should consider getting out of consumer electronics?

But, of course, the analyst mantra this time around was that “it’s not the earnings, it’s the outlook,” and here’s what Microsoft had to say:

Microsoft management offers the following guidance for the fiscal second quarter ending December 31, 2006:

• Revenue is expected to be in the range of $11.8 billion to $12.4 billion, which reflects approximately $1.5 billion of revenue deferrals that will be captured in the fiscal third quarter as noted below.
• Operating income is expected to be in the range of $2.9 billion to $3.1 billion, which reflects approximately $1.5 billion of deferrals noted below.
• Diluted earnings per share are expected to be $0.22 to $0.24, which includes an $0.11 per share impact for deferrals noted below.

Note: The guidance above includes the impact of an approximately $1.5 billion of revenue deferral from the second to the third quarter, primarily related to the technology guarantee programs announced on October 24, 2006 for Windows Vista and the 2007 Microsoft Office system.

Management offers the following guidance for the full fiscal year ending June 30, 2007:

• Revenue is expected to be in the range of $50.0 billion to $50.9 billion.
• Operating income is expected to be in the range of $19.1 billion to $19.5 billion.
• Diluted earnings per share are expected to be in the range of $1.43 to $1.46.

There don’t appear to be any big surprise there, but, pundits, start your engines!

Update: Some related notes:

• Microsoft CFO Chris Liddell tells Reuters that the incomplete share buyback shaved $0.04 off the full year outlook.