Microsoft News Tracker

Wall Street was expecting Microsoft to deliver strong 4th quarter results and while they were strong, they slightly missed expectations and with what was perceived to be cautious guidance for FY2009, shares were down in after hours trading.

The Redmond, Wash.-based company handed in net income of $4.3 billion, or 46 cents a share, up from $3 billion, or 31 cents a share, a year ago.

Total revenue rose 18% to $15.84 billion.

Analysts polled by FactSet Research were looking for a profit, on average, of 47 cents a share with revenue of $15.6 billion.
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Microsoft said it expects to post a first-quarter profit of 47 or 48 cents a share with revenue in a range of $14.7 billion to $14.9 billion. Wall Street previously forecast a profit of 50 cents a share.

Looking at the segments, the good news was that compared to the very odd 3Q, Microsoft’s cash cows got back to churning up the butter while the bad news was that the "big bets" as usual were off their feed. Below are the segment breakouts for 4Q with some brief commentary based on the 8-K.

Client:

OEM license units were up 22% yielding a 13% revenue gain, while commercial and retail revenue was up 22% "from Enterprise Agreements and anti-piracy efforts in emerging markets." The estimated PC shipment growth rate was 12-14% which seems a bit light, but Microsoft client revenues and income are keeping pace with PC sales which is all that anyone asks.

Business (mostly Office):

Business revenue up 19%, consumer revenue down 7%, a plus 6% from currency rates, and by golly, MBS billings were up 22%. Expenses were up a bunch including development headcount, online services (hint, hint) and some charges for the troubled acquisition of FAST.

Server and Tools:

Server and Tools continues to rock the house. One interesting note: "Consulting and Premier and Professional product support services revenue increased $179 million or 30%, primarily due to higher demand for consulting and support services in corporate enterprises."

Entertainment and Devices (mostly Xbox):

The income for 4Q07 is distorted by the $1 billion dollar charge for defective Xbox consoles, but after you get rid of that it looks like not much has changed for E&D despite sales being up because they were matched by expenses.

Online Services:

Online advertising revenue grew 18% ($93M), but cost of revenue increased by $251 million "primarily driven by increased data center and equipment costs, online content expenses, and aQuantive-related expenses." Other expenses were unsurprisingly up too including a 39% in headcount related expenses. Still building for the future, I guess.

Corporate Level Activity (overhead and legal):

Headcount was called out for a 10% expense increase.

Bottom Line: It’s back to normal for Microsoft after the odd 3Q results. The three Microsoft cash cows (Windows Client, Office, and Servers) delivered in accustomed fashion while Entertainment and Devices and Online Services keep spending money on a nebulous future.

MSFTextrememakeover is shutting down his always interesting blog and by way of a farewell present provides a lengthy valedictory post about all the things that are wrong with Microsoft from a shareholder’s perspective - Eight Years of Wrongness:

For example, I bought my first MSFT shares back in the early 90’s. Like most holders that decade, I did very well. Then came this one, which has been an absolute disaster.

It’s sobering to realize that during Ballmer’s term as CEO, MSFT has underperformed almost all of its top tech peers (including AAPL, IBM, HPQ, SAP, INTC, CSCO, SYMC, NOK, ORCL, ADBE, RIMM, QCOM, Ebay, and AMZN), and badly lagged the major averages. We may even see our third plunge to test the 2000 lows during his watch. Unbelievable. There may be another major technology CEO with an equivalent or worse track record who is still in power, but a name doesn’t come readily to mind. Indeed, it’s instructive to note the four companies who didn’t make my list above: DELL, YHOO, Sony and Sun. In other words, four well-publicized flameouts/turnaround stories (depending on your perspective), all of which have new CEOs. Go figure.
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So it’s time for me to listen to the fat lady who has been singing for years now, and finally pull the plug. I can’t keep waiting another 11 years for MSFT’s leadership to deliver the returns that say AAPL’s have in just the past 12 months …

What follows is a lengthy dissection of Microsoft’s business which may be briefly summarized as Microsoft has become a bloated bureaucracy throwing money and people at "big bets" that aren’t paying off while mishandling the cash cows that are financing the party. I highly recommend you read his assessment and I agree with it, although I am somewhat more sanguine about the cash cows and would observe that Microsoft has had one sterling success in the last eight years - the server operating systems and server software which started to gain real momentum circa Windows 2000. Who knew there were high margin, low capital outlay profits in the software business?

Less cynically, Microsoft is suffering from the malaise that commonly afflicts successful companies. When they are young and hungry they conquer a market or several related ones which makes slower growth inevitable accompanied by a "middle age spread" of bloated headcounts and bureaucracy. However, management still yearns for the glory of the company’s lost youth and goes through a "midlife crisis" of mostly outlandish gyrations until a transition to maturity finally occurs, hopefully without lasting damage. Microsoft’s particular problem is that their core business is so incredibly profitable that management can indulge the midlife crisis on an unprecedented scale.

Shareholders were justifiably nervous after the first good news called out in the 3Q08 Microsoft earnings report was that the nearly profitless sinkhole of Entertainment and Devices grew revenues by 68%. That such a diversion was necessary was because the milk yields of Microsoft’s leading cash cows, Windows and Office, dropped in a still mostly unexplained manner.

Below are the segment breakouts with some brief commentary based on the 10-Q.

Client:

The big hit here is the $1.14 billion of deferred revenue that got tacked on in 3Q07, but even removing that, revenues were down over last year despite OEM sales (which account for 80% of unit sales) being up 5% and the "premium mix" being up as well. Estimated PC sales growth was 8-9% and theories ranging from piracy to Apple/Linux competition to Microsoft shifting revenue to next quarter have been offered for the shortfall.

Business (mostly Office):

Subtracting the $500M deferred revenue booked in 3Q07 makes this look much better apparently due to strong Office revenue growth from businesses, but consumer revenue was actually down. R&D expenses were up 19% driven by headcount expenses and headcount itself was up 7%, presumably not to add bells and whistles to the traditional Office product.

Server and Tools:

Another sterling quarter for Server and Tools who launched major new products.

Entertainment and Devices (mostly Xbox):

The good news is that E&D made money in 3Q. The bad news is that it didn’t make much, but then it never does. R&D expense was up 26% and sales and marketing expenses were up 29%.

Online Services:

Online advertising revenue grew 39% ($175M) to $619 million including aQuantive’s $47 million. aQuantive also added $97 million in agency revenue. So where did it all go? There was a large write-off from the acquisition of aQuantive plus increases in general expenses for infrastructure, "online content expenses," and headcount. One item that caught my eye was "a $24 million in-process research and development write-off." The Online Services Business (OSB) doesn’t seem to be going anywhere fast. The question, of course, is whether it would go any faster with the addition of Yahoo.

Corporate Level Activity (overhead and legal): 

The big ticket item here was an increase of $1.2 billion in legal expenses including the EU fine.

Bottom Line:

Out of Microsoft’s three cash cows (Windows Client, Office, and Servers) only Servers delivered in accustomed fashion. Entertainment and Devices is all sound and fury signifying nothing, while Online Services is treading water waiting for a Yahoo life preserver

Nicholas Carr is providing this weekend’s Microsoft buzz with a rumor that Microsoft is getting ready to roll out a Web apps strategy if not necessarily any actual apps:

Put your ears to the ground, my friends, for the Beast of Redmond may be stirring. I’ve heard that Microsoft has begun briefing its large enterprise clients on an expansive and detailed strategy for moving its software business into the cloud. If the report proves correct - and I make no guarantees - the company will unveil the strategy to the public either next week or the week after.
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The new strategy will, I’m told, lay out a roadmap of moves across three major areas: the transformation of the company’s portfolio of enterprise applications to a web-services architecture, the launch of web versions of its major PC applications, and the continued expansion of its data center network.

And in the latter regard, Carr has a double header - Rumor: Microsoft set for vast data-center push:

I’ve received a few more hints about the big cloud-computing initiative Microsoft may be about to announce, perhaps during the company’s Mix08 conference in Las Vegas this coming week. One of the cornerstones of the strategy, I’ve heard, will be an aggressive acceleration of the company’s investment in its data center network. The construction program will be “totally over the top,” said a person briefed on the plan. The first phase of the buildout, said the source, will include the construction of about two dozen data centers around the world, each covering about 500,000 square feet or more. The timing of the construction is unclear.

You can’t have a good cloud strategy without plenty of capex, of course, but what with the Yahoo acquisition this seems like a fairly stressful time to be raiding the piggy bank. It’s a good thing Microsoft has all those old-fashioned operating systems and offline applications to foot all these bills.

Less snarkily, if these rumors pan out, it will be interesting indeed to see how Microsoft manages to finesse “software plus services” to avoid killing the cash cows while simultaneously avoiding owning some large buildings stuffed with unused computers. And no, I won’t complain about all the times Microsoft disparaged Web apps.

Related: Michael Arrington reports a rumor that Microsoft may also be announcing at Mix08 an offline version of Silverlight to compete with Adobe Air for the Rich (and occasionally offline) Internet Application business.

Microsoft beat Wall Street expectations today when it announced its fiscal 2Q08 results:

Microsoft Corp. said Thursday that earnings jumped 81% for the December quarter thanks mostly to strong sales of its Windows software, and the software giant raised its outlook for the full fiscal year ending in June.

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Microsoft said net income for the period ended in December rose to $4.7 billion, or 50 cents a share, from $2.6 billion, or 26 cents a share in the same period a year earlier. Meanwhile revenue rose 31% to $16.37 billion.

Analysts on average have been estimating Microsoft would post earnings of 46 cents a share, on $15.95 billion in revenue for the quarter, according to Thomson Financial.

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Based on strong second-quarter results, the company raised its outlook for the full fiscal year ending in June. Microsoft said it now expects earnings between $1.85 and $1.88 a share for the year, and revenue between $59.9 billion and $60.5 billion. Analysts have been expecting earnings for the full year of $1.81 a share, and revenue of $59.36 billion.

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The company said its client unit, which includes Windows, posted a 68% gain in revenue in the second quarter, to $4.34 billion.

Note that the big gain for Windows client is partially due to the large revenue deferral a year ago, When that is added back in, the client revenue growth was only 18% and overall revenue growth was 15% instead of 31%. Note also that foreign currency exchange rates added 3% to revenue overall.

Below are the segment breakouts with some brief commentary based on the 10-Q.

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