Microsoft News Tracker

Microsoft beat Wall Street expectations today when it announced its fiscal 3Q07 results:

Microsoft Corp. today announced revenue of $14.40 billion for the quarter ended March 31, 2007, a 32% increase over the same period of the prior year. This revenue drove record profits with operating income of $6.59 billion and net income of $4.93 billion. Diluted earnings per share for the quarter grew 72% to $0.50, and included $0.02 in tax benefits and $0.01 in legal charges.

These results reflect $1.67 billion of revenue and operating income, $1.14 billion of net income and $0.12 of diluted earnings per share that were previously deferred primarily related to the technology guarantee programs for Windows Vista™ and the 2007 Microsoft® Office release.

The good news was clearly driven by Vista and Office, but Microsoft oddly provided none of the usual commentary in the 10-Q report so it is hard to really get insight into the numbers. In any case, below are the segment breakouts with some brief commentary. Last quarter I indicated the effect of adding back in the deferred Vista and Office revenue mentioned above - correspondingly, I mention below the results for 3Q with the deferred revenue subtracted.

Client:

Subtract the $1.1 billion of Client revenue that was deferred last quarter and you still get a 33% increase which is substantially above estimates of PC unit sales growth, so it looks like the Vista upsell is producing results. Microsoft gave no indication of units sold however, so it is hard to tell for sure. Also note that unlike XP, Microsoft is not deferring any Vista revenue and income to later years.

Business (mostly Office):

Subtract the $0.5 billion of Office revenue that was deferred and you get a 20% increase which is substantially better than past quarters. Once again, without an indication of units sold it’s hard to determine exactly what is going on.

Entertainment and Devices (mostly Xbox and an occasional Zune):

It looks like the competition cut into Xbox 360 sales which while bad news for revenue, is good for income in this perennially losing business.

Online Services:

As always lately, Online is in the tank with no sign of a life preserver.

Server and Tools:

Server and Tools may be slowing its torrid pace a bit, but there are some big products coming out in the next year.

Bottom Line:

Microsoft reported that there was $1.1 billion in net income deferred last quarter for Vista and Office 2007, but gave no break out. Subtracting that out would give Client and Business in aggregate 35% income growth which is certainly healthy, but again hard to gauge without unit sales numbers.

If it seems that I am harping on that aspect, the reason is that the 3rd quarter performance could be due to either or both of a temporary bulge in Vista and Office sales in their otherwise mature markets or an increase in per unit revenue and income. The amount attributable to each would indicate how sustainable this performance really is. The Microsoft management outlook for 2008 (first link above) is considerably milder (11-12% over 2007) than these results, so my belief is that the 3Q07 performance was mostly a one time shipment bulge.

Update: Some of the segment discussion that used to be in the 10-Q appeared in the slide deck for the earnings conference call. It was a shipment bulge and while Client “premium share” grew to 71% from 53%, that was claimed to have added only a percentage point to OEM revenue.