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January 25, 2007

Microsoft 2Q FY07 earnings pregame show

Posted by David Hunter at 12:43 PM ET.

Microsoft will announce its financial results for the 2nd quarter of its 2007 fiscal year (4Q2006 calendar year) this afternoon after the market closes. Here’s a round-up of punditry on what to expect:

First of all, the basics:

Microsoft said it expects to earn between 22 cents per share and 24 cents per share on revenue of $1.5 billion to $11.8 billion, with $1.5 billion of revenue deferred due to delays in getting Vista to market.

Analysts polled by Thomson Financial expect Microsoft to earn 23 cents per share on $12.07 billion in sales.

More on that $1.5 billion deferral below. Now for some analysts from the same link:

In a Jan. 16 note to investors, Lehman Brothers analyst Israel Hernandez wrote that he expects Microsoft’s Server and Tools group to post better-than-expected revenue in the quarter, but that the online business, including the company’s recently launched search and display advertising platform, lagged.

No real surprises there, that’s what Microsoft’s Server and Tools, and Online businesses do best.

UBS analyst Heather Bellini wrote in a Jan. 22 note to investors that better-than-expected sales of the Xbox console and games helped buoy Microsoft in the quarter.

“Our channel checks indicate strong demand for Office 2007 due to its collaborative features that allow users to share data more efficiently. We believe that solid demand for Office 2007 is driving more enterprises to renew their subscription agreements,” she added.

Since the game profits have to overcome the loss on every Xbox 360, it will be interesting to see exactly how much buoying of profits there actually is and, of course, the Zune marketing campaign is another boat anchor for Entertainment and Devices profits. The Office 2007 technical description is a trifle wacky, but one of the reasons for getting Vista and Office 2007 out in 2006 was to convince volume purchase customers to renew their Software Assurance contracts, so maybe there is some gold there.

As for the $1.5 billion Vista deferral:

Under the Vista “Express Upgrade,” users who purchase a computer with XP or Office 2003 will be eligible for an upgrade to Vista or Office 2007 at a steep discount or for free.

As a result of the program, which spans five months and ends March 15, Microsoft cannot claim revenue booked under this program until the users take advantage of the vouchers or coupons, said Charles Di Bona, an analyst with Sanford C. Bernstein.

The size of this revenue deferral is $1.5 billion.

We’ve previously discussed the Vista coupons and Microsoft’s related scurrying to claim the oddly arranged deferral, but the real question is how many people are actually going to take Microsoft up on their offer particularly for the Vista coupons that require an additional payment. You can examine Microsoft’s deferral assumptions in the PowerPoint slide deck where they also revealed that they will actually also be getting a revenue and earnings boost by not taking an undelivered element deferral for Vista like they did for Windows XP. Confusing? You bet. 

But these are future considerations and not really relevant for 2Q FY07 where the question is more mundane – Did Client grow with the PC market at about 8% deferral or not? Profits almost surely didn’t due to Vista expenses. As for Business (mostly Office), specifying a benchmark is more difficult, but beating last quarter’s anemic growth would be nice although the profits will likely get eaten again by Office 2007 expenses.

Filed under Financial, General Business, Microsoft

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One Response to “Microsoft 2Q FY07 earnings pregame show”

  1. Microsoft profits tank, blames pesky coupons -- Microsoft News Tracker Says:

    [...] It should be “still beat the already reduced expectations”, as I mentioned earlier today. [...]

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