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July 20, 2006

Microsoft 4Q06 earnings segment breakout

Posted by David Hunter at 7:19 PM ET.

As always I took a look at the segment breakout of Microsoft’s 4Q earnings statement to see what it says about the various businesses. The numbers are reproduced below following some one-liners about the segments results.

Cash cows:

Client revenue and income were up nicely for a change: “Client revenue increased reflecting $330 million or 13% growth in OEM revenue driven by 19% growth in OEM licenses and $32 million or 6% growth in revenue from commercial and retail licensing.” However, the puzzle is why OEM revenue lagged licenses by so much and how there was a 19% growth in licenses when PC shipments were only up 10%. There was a billing switch which accounts for part of it.

Office (aka Information Worker) showed a more than nominal uptick for a change, part of which was due to a billing switch as well.

Server and Tools solidifies its position as head heifer of the herd with a 53% income gain on 18% revenue growth driven by SQL Server and Windows Server.

The Calves:

MSN revenues continued to go down as it loses ISP subscribers and the income did the same more rapidly due to greatly increased expenses including “$105 million or 64% increase in research and development costs, a $101 million or 67% increase in sales and marketing expenses, and a $52 million or 29% increase in cost of revenue as we continue to invest in MSN adCenter, Windows Live and other new platforms.” At this rate, the Xbox is soon going to have competition for loss leader.

Microsoft Business Solutions made it into the black as it does occasionally and Mobile and Embedded shaved its loss a little over last year. These two segments will “disappear” from the reporting next year as we discussed earlier in the week.

The Bull:

It’s likely stretching the bovine herd analogy too far, but Home and Entertainment continues to have a unique role as the source of both sizable revenue and operating loss spikes as the “below cost” Xbox 360 rolls out, 1.8 million of which were shipped during the quarter.


Three Months Ended
June 30

(millions) % change 2006 2005

Client %12.0 $3,376 $3,014
Server and Tools 18.1 3,184 2,696
Information Worker 6.4 3,133 2,944
Microsoft Business Solutions 15.7 280 242
MSN (3.0) 580 598
Mobile and Embedded Devices 41.3 113 80
Home and Entertainment 93.9 1,138 587


Total revenue %16.2 $11,804 $10,161

Operating Income / (Loss)

Three Months Ended
June 30

(millions) % change 2006 2005

Client %14.7 $2,504 $2,183
Server and Tools 53.4 1,249 814
Information Worker 6.9 2,150 2,011
Microsoft Business Solutions - 38 (84)
MSN (288.1) (190) 101
Mobile and Embedded Devices - (2) (15)
Home and Entertainment - (414) (201)
Corporate-level Activity - (1,454) (1,820)


Total Operating Income %29.8 $3,881 $2,989

Filed under Financial, General Business, Microsoft

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