 |
Microsoft yesterday reported 2nd quarter financial results for FY 2010 (ending Dec. 31, 2009) and sales of Windows 7 have jump started the old Microsoft money machine that had been stalled last quarter.
Microsoft Corp. today announced record revenue of $19.02 billion for the second quarter ended Dec. 31, 2009, a 14% increase from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $8.51 billion, $6.66 billion and $0.74 per share, which represented increases of 43%, 60% and 57%, respectively, when compared with the prior year period.
These financial results include the recognition of $1.71 billion of deferred revenue, an impact of $0.14 of diluted earnings per share, relating to the Windows 7 Upgrade Option Program and pre-sales of Windows 7 to OEMs and retailers before general availability. Adjusting for the deferred revenue recognition, second-quarter revenue totaled $17.31 billion, and diluted earnings per share totaled $0.60 per share.
“Exceptional demand for Windows 7 led to the positive top-line growth for the company,” said Peter Klein, chief financial officer at Microsoft. “Our continuing commitment to managing costs allowed us to drive earnings performance ahead of the revenue growth.”
Windows 7 and Windows Server 2008 R2 launched globally on October 22 as anticipated. Through the second quarter, Microsoft has sold over 60 million Windows 7 licenses making it the fastest selling operating system in history.
“This is a record quarter for Windows units,” said Kevin Turner, chief operating officer at Microsoft. “We are thrilled by the consumer reception to Windows 7 and by business enthusiasm to adopt Windows 7.”
Taking a look at the quarterly results of each of the business units from the 10-Q filing:
Windows & Windows Live
Windows Division revenue increased due to strong sales of Windows 7 and PC market improvement. We estimate total worldwide PC shipments from all sources grew approximately 15% to 17%. OEM revenue increased $2.3 billion or 72%. Excluding $1.7 billion of revenue recognized related to the Windows 7 Deferral, OEM revenue increased $664 million or 21%, while OEM license units increased 22%. The OEM revenue increase was primarily driven by PC market growth, higher Windows attach rates across all regions, channels, and types of PCs and the restoration of normal OEM inventory levels, offset in part by PC market changes, including stronger growth of consumer PCs versus business PCs and of emerging markets versus developed markets. Other revenue increased $511 million or 60% driven primarily by strong Windows 7 retail sales.
Costs were up for Windows 7 marketing and yes, business is lagging consumers in both PC purchases and Windows 7 adoption rates, but it is a solid story albeit one that Microsoft wished they could have told when Vista shipped. Windows Live is apparently a fly speck.
Server & Tools
Server and Tools revenue increased reflecting growth in product revenue, offset in part by a decline in services revenue. Product revenue increased $103 million or 3%, primarily driven by growth in Windows Server, Enterprise CAL Suites and System Center revenue. The growth in product revenue reflects continued adoption of Windows platform applications. Services revenue declined $14 million or 2%, primarily due to decreased revenue from consulting services.
Server and Tools operating income increased primarily due to product revenue growth and a decrease in research and development expenses. Research and development expenses decreased $41 million or 7%, primarily driven by decreased headcount-related expenses and third-party development and programming costs.
Server and Tools is still in the doldrums and likely will remain there until there is a turnaround in the general economy. Meanwhile they are cutting costs.
Microsoft Business Division (mostly Office)
MBD revenue decreased reflecting decreased business revenue partially offset by increased consumer revenue. Business revenue decreased $231 million or 6%, primarily reflecting a decline in licensing the 2007 Microsoft Office system to transactional business customers, offset in part by a 1% increase in Microsoft Dynamics revenue. Consumer revenue increased $95 million or 12%, primarily as a result of growth in the PC market.
MBD operating income was flat reflecting decreased revenue, offset by decreased sales and marketing and research and development expenses. Sales and marketing expenses decreased $81 million or 7%, primarily driven by a decrease in corporate marketing activities and headcount-related costs associated with our corporate sales force. Research and development expenses decreased $64 million or 15%, primarily as a result of capitalization of certain Microsoft Office system software development costs.
Another division awaiting a general economic rebound. I don’t think Office 2010’s expected arrival in June will change the story in the same way that Windows 7 did.
Online Services Division
OSD revenue decreased as a result of lower Access and online advertising revenue. Access revenue decreased $14 million or 29%, reflecting continued migration of subscribers to broadband or other competitively-priced service providers. Online advertising revenue decreased $11 million or 2%, to $516 million, reflecting a decrease in display advertising and advertiser and publisher tools revenue, offset in part by an increase in search revenue. Foreign currency exchange rates accounted for a $13 million or two percentage point increase in revenue.
OSD operating loss increased mainly due to increased cost of revenue and decreased revenue, offset in part by decreased research and development expenses. Cost of revenue increased $171 million or 50%, primarily driven by higher online traffic acquisition costs. Research and development expenses decreased $49 million or 17%, primarily due to decreased third-party development and programming costs and headcount-related expenses.
OSD is in the red yet again and the fact that the decline in Microsoft’s old dial-up ISP business (Access) is material to the bottom line shows that it is still struggling. The only good news was that search revenue was up, but not enough to counteract the slump in display ads on Microsoft Web properties.
Entertainment & Devices Division
EDD revenue decreased reflecting a $295 million or 12% decline in Xbox 360 platform and PC game revenue. This decrease was due mainly to decreased revenue from Xbox 360 video games, decreased Xbox 360 consoles sold, and decreased revenue per console, offset in part by increased Xbox LIVE revenue. The decreased revenue from Xbox 360 video games was due primarily to the release of two significant games in the second quarter of the prior year. We shipped 5.2 million Xbox 360 consoles during the second quarter of fiscal year 2010, compared with 6.0 million Xbox 360 consoles during the second quarter of fiscal year 2009. The decreased revenue per console resulted from price reductions during the past 12 months. Non-gaming revenue decreased $59 million or 8%, primarily reflecting decreased sales of Zune digital music and entertainment devices and Windows Mobile device platforms. Foreign currency exchange rates accounted for a $49 million or two percentage point increase in revenue.
EDD operating income increased due to reduced operating expenses. Cost of revenue decreased $478 million or 23%, primarily due to lower Xbox 360 console costs, offset in part by increased royalties to partners related to increased Xbox LIVE transactions. Sales and marketing expenses decreased $75 million or 15%, primarily due to decreased marketing for the Xbox 360 platform. Research and development expenses decreased $50 million or 10%, primarily reflecting decreased headcount-related expenses and third-party development and programming costs.
EDD nearly tripled their profit compared to the year ago quarter despite reduced revenue. This was due to Xbox 360 cost reductions which is perhaps all that can be expected until the economic outlook improves. Sales of the Zune and more shockingly, Windows Mobile, didn’t help any.
Bottom line:
All in all, it was a solid performance by Microsoft given the economic conditions and the overall result beat Wall Street estimates with a mild boost to the stock price in after hours trading. Windows 7 could not have come along at a better time for Microsoft.
Microsoft yesterday revealed the versions and estimated US retail pricing for Office 2010 which is coming in June. Here’s a summary table:
| Version | Retail Boxed Product | Product Key Card |
| Office Home and Student | $149 | $119 |
| Office Home and Business | $279 | $199 |
| Office Professional | $499 | $349 |
| Office Professional Academic | $99 | N/A |
The exact contents of each version are shown in this Microsoft document but basically Home and Student has Word, Excel, PowerPoint, and OneNote; Home and Business adds Outlook; and Professional adds Publisher and Access. As always, the academic version is available through academic resellers for use by academic faculty and students.
The Product Key Card is a new retail delivery mechanism where the consumer effectively purchases a license number that will unlock a copy of Office that has been preloaded on their new PC by the manufacturer along with the free Office Starter 2010 Edition which includes advertising supported editions of of Word and Excel. Note also that:
Ed Bott has a useful discussion of the changes compared to Office 2007 which include price decreases at the low end where Microsoft has the most competition from free Office alternatives (Starter Edition will help too) and the complete elimination of upgrade pricing. Microsoft may have been forced into the latter by the complexity of dealing with new electronic delivery mechanisms like the Product Key Card and Click-To-Run, but I am sure that the idea that a new PC simply deserves a new version of Office without fooling with an upgrade is something that their marketers would love to foster.
The European Union Competition Commission today dropped their Web browser antitrust case against Microsoft after final agreement was reached on Microsoft providing a Web browser choice to EU Windows users:
The European Commission has adopted a decision that renders legally binding commitments offered by Microsoft to boost competition on the web browser market. The commitments address Commission concerns that Microsoft may have tied its web browser Internet Explorer to the Windows PC operating system in breach of EU rules on abuse of a dominant market position (Article 102 of the Treaty on the Functioning of the European Union -TFEU). Microsoft commits to offer European users of Windows choice among different web browsers and to allow computer manufacturers and users the possibility to turn Internet Explorer off. Microsoft is also publishing today an undertaking whereby it commits to make far-reaching interoperability disclosures.
I haven’t yet seen the Microsoft "interoperability undertaking" which is supposed to be published today, but that harks back to the previous EU Microsoft antitrust case where interoperability disclosures were a perennial source of contention. As for the browser choice, here’s how the EU says it will work if you are a EU Windows user:
- [Affects] More than 100 million European users of Windows operating systems (XP, Vista, 7, and successors) and many millions more in the future.
…
- You will be offered a ‘browser Choice Screen’ where you can freely choose one (or more) of the 12 most popular web browsers, including Mozilla Firefox, Google Chrome, Apple Safari and Opera.
- Each browser will be accompanied by information from the producer, to help you – the customer – make a free and informed choice.
- If you have Microsoft’s web browser set as your default browser and have chosen to ‘automatically accept Windows updates’, you will be automatically directed to the ‘Choice Screen’. If updates are not automatically installed, you will be offered an option to confirm you want to receive the Choice Screen update.
…
- The browser Choice Screen software update will start in March 2010.
- The Choice Screen update will be available for 5 years.
This strikes me as a smart move on Microsoft’s part. Butting heads with the Neelie Kroes has proven to be be a no-win strategy and offering the choice screen is cheap and more cynically, will likely not discernibly affect the market share of Internet Explorer. Yes IE’s share is dropping in Europe and elsewhere, but my impression is that any PC user savvy enough to want another Web browser can already find it without a choice screen. So, the Eurocrats are now happy and Microsoft has dodged another expensive legal bullet.
UPDATE: Microsoft’s Brad Smith, Senior Vice President and General Counsel has issued a statement and besides discussing the choice screen, details the "interoperability undertaking":
The second measure is a “public undertaking” that covers interoperability with Microsoft’s products—the way our high-share products work with non-Microsoft technologies. This applies to an important set of Microsoft’s products—our Windows, Windows Server, Office, Exchange, and SharePoint products. We believe it represents the most comprehensive commitment to the promotion of interoperability in the history of the software industry. Under this undertaking, Microsoft will ensure that developers throughout the industry, including in the open source community, will have access to technical documentation to assist them in building products that work well with Microsoft products. Microsoft will also support certain industry standards in its products and fully document how these standards are supported. Microsoft will make available legally-binding warranties that will be offered to third parties.
Our interoperability undertaking reflects the policy outlined by the European Commission in a major policy speech given by Commissioner Neelie Kroes in June 2008. At that time, the Commissioner said that companies offering high-share software products should be required to (i) disclose technical specifications to enable interoperability; (ii) ensure that competitors can access complete and accurate information and have a remedy if not; and (iii) ensure that the technical specifications are available at fair royalty rates, based on the inherent value of the technology disclosed. Our interoperability undertaking, developed through extensive consultation, implements this approach in full.
As we’ve said before, we are embarking on a path that will require significant change within Microsoft. Nevertheless, we believe that these are important steps that resolve these competition law concerns.
Click through for a host of Microsoft documents including the Microsoft Public Undertaking (Word file) itself. This is being overshadowed in the news by the browser choice screen, but I suspect the interoperability agreement is more important. I have not read the fine print yet or seen the Open Source reaction, but I hope that the EU Competition Commission and Microsoft really and truly understand each other on this topic or things could get quite unpleasant.
Microsoft’s investigation into allegations that the code for the new MSN China Juku social networking feature was stolen has ended with an admission by the contractor that it was "copied" apparently from a startup called Plurk. As a result, MSN China will be suspending Juku indefinitely. Michael Arrington at TechCrunch gets the best line award for:
Fiirst, Microsoft is standing around with their pants around their ankles looking pretty ridiculous right now. And second, this is the best thing to happen to Plurk, ever.
