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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 today announced 800 more employee layoffs around the world. The public head counting is bit vague, but a Microsoft spokesman said that the company had already let go most of the 5,000 employees promised in January so today’s 800 layoffs were new and additional. On the other hand. if you like to try to read the tea leaves:
The software maker, based in Redmond, Wash., employed about 94,000 people as of the end of December 2008. At the end of September, about 91,000 people worked for Microsoft, indicating the company has added 2,000 jobs this year.
Perhaps, but it is cold comfort for those laid off although typical of the large corporation that Microsoft has become to be unable to manage their portfolio of activities without gratuitous layoffs whenever an economic downturn provides air cover. Among those laid off was Don Dodge, formerly Microsoft’s Director of Business Development for the Emerging Business Team who has been quoted a number of times on this blog.
Microsoft today reported the results for 4Q of fiscal 2009 and it wasn’t a pretty picture:
Microsoft Corp. today announced revenue of $13.10 billion for the fourth quarter ended June 30, 2009, a 17% decline from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $3.99 billion, $3.05 billion and $0.34 per share, which represented declines of 30%, 29% and 26%, respectively, when compared with the prior year period.
“Our business continued to be negatively impacted by weakness in the global PC and server markets,” said Chris Liddell, chief financial officer at Microsoft. “In light of that environment, it was an excellent achievement to deliver over $750 million of operational savings compared to the prior year quarter.”
The financial results for the fourth quarter ended June 30, 2009, included the deferral of $276 million of revenue related to the Windows 7 Upgrade Option program that was announced on June 25, 2009. This revenue deferral reduced earnings per share by $0.02.
Even worse, the results fell short of what Wall Street had been predicting and Microsoft shares were down 8% in after hours trading.
I haven’t done a detailed look at the segments yet, but even the usually unstoppable Server and Tools was down from last year. A high level summary of 4Q results from the Microsoft report:
Client - Revenue down 29%, Income down 33%
Microsoft Business Division (Office) - Revenue down 13%, Income down 16%
Server and Tools - Revenue down 6%, Income down 1%
Online Services Business - Revenue down 13%, Income down 51% - lost $732M on revenues of $731M
Entertainment and Devices Division - Revenue down 25%, Income up 24% (the loss got smaller)
The long rumored Google operating system for PCs has finally been announced:
It’s been an exciting nine months since we launched the Google Chrome browser. Already, over 30 million people use it regularly. We designed Google Chrome for people who live on the web — searching for information, checking email, catching up on the news, shopping or just staying in touch with friends. However, the operating systems that browsers run on were designed in an era where there was no web. So today, we’re announcing a new project that’s a natural extension of Google Chrome — the Google Chrome Operating System. It’s our attempt to re-think what operating systems should be.
Google Chrome OS is an open source, lightweight operating system that will initially be targeted at netbooks. Later this year we will open-source its code, and netbooks running Google Chrome OS will be available for consumers in the second half of 2010. Because we’re already talking to partners about the project, and we’ll soon be working with the open source community, we wanted to share our vision now so everyone understands what we are trying to achieve.
The Chrome OS is based on Linux and will run on both x86 and ARM microprocessors and Google claims to be "working with multiple OEMs to bring a number of netbooks to market next year." Google’s vision is of a Web operating system running a browser and running Web applications within that instead of traditional PC applications. As for overlap with Google’s Android operating system seen mostly on cell phones, here’s the official delineation:
Android was designed from the beginning to work across a variety of devices from phones to set-top boxes to netbooks. Google Chrome OS is being created for people who spend most of their time on the web, and is being designed to power computers ranging from small netbooks to full-size desktop systems.
Assuming that Google’s vision of a Web operating system and applications appeals to budget netbook buyers as much as shaving the Windows XP license fee, it will definitely impact Microsoft’s Client operating system business which has already been hit by netbooks running the low-priced Windows XP instead of Vista.
However, that is a big assumption since many netbook purchasers are buying them as cheap notebook PCs and expect to run the usual local PC applications (open source or otherwise). As for regular notebook and desktop PC buyers, it harks back to the Linux versus Windows competition for client PCs which so far has not been overly kind to Linux. Still, Google gets points for making things interesting for Microsoft and perhaps they will actually make inroads onto Microsoft’s turf.
