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July 19, 2007

Microsoft 4Q07 earnings meet expectations

Posted by David Hunter at 8:05 PM ET.

Microsoft met Wall Street expectations today when it announced its fiscal 4Q07 results:

Microsoft Corp. today announced revenue of $13.37 billion for the quarter ended June 30, 2007, a 13% increase over the same period of the prior year. Diluted earnings per share for the quarter were $0.31. Excluding $0.08 of previously announced charges primarily related to Xbox 360™ warranty policies, earnings per share would have been $0.39, an increase of 26% over the same period of the prior year when also adjusted for certain items.

Microsoft also slightly raised the guidance for fiscal 2008. Below are the segment breakouts with some brief commentary. 

Client:


(millions) % change 4Q07 4Q06

Revenue %14 $3,808 $3,347
Operating Income 11 2,818 2,546

Revenue was slightly above and income slightly below PC sales growth for the quarter, so it’s not really clear that Microsoft is getting any meaningful benefit from the premium mix increasing “17 percentage points to 72% driven by the demand for Windows Vista Home Premium.”  Helping income was a 1% headcount decrease.

Business (mostly Office):


(millions) % change 4Q07 4Q06

Revenue %19 $4,633 $3,905
Operating Income 19 2,994 2,524

Business, as expected, got a nice boost from Office 2007 sales, primarily to businesses. There was a 6% headcount increase.

Entertainment and Devices (mostly Xbox and an occasional Zune):


(millions) % change 4Q07 4Q06

Revenue %(10) $1,159 $1,281
Operating Income (183) (1,199) (423)

Xbox 360 sales were down, but that was partially offset by increased sales of Xbox games and accessories and Zunes. The operating income was reduced by $1.06 billion for the billion dollar band-aid so excluding that, the division nearly broke even which has to be good news. Some Xbox cost reductions were also noted as well as a countervailing 9% headcount boost.

Online Services:


(millions) % change 4Q07 4Q06

Revenue %19 $688 $580
Operating Income (28) (239) (187)

A 33% increase in online advertising revenues was partially offset by the continuing decline in ISP revenues. Income continues to take a hit from ”increased data center costs, online content expenses, and royalties. Headcount-related costs increased 30%, driven by a 12% increase in headcount and an increase in salaries and benefits for existing headcount.”

Server and Tools:


(millions) % change 4Q07 4Q06

Revenue %15 $3,082 $2,691
Operating Income 15 1,054 913

Server and Tools continued its slight slowdown from last quarter, but there are some big products coming out in the next fiscal year. There was an 11% headcount increase.

Corporate Level Results (overhead and legal): 


(millions) % change 4Q07 4Q06

Corporate level results %4 $(1,439) $(1,492)

Despite “insignificant legal costs” compared to 2006, the overhead was down only 4%. The reason was a whopping 19% increase in headcount.

Bottom Line:

It’s not a bad earnings report, but hardly exciting either. Some causes for concern are Vista’s continuing inability to deliver increased per unit revenue and the burgeoning headcount everywhere but in Client. The best news is that the Xbox 360 may actually be turning the corner into modest profitability (after it gets fixed) which would remove that albatross from around the neck of the balance sheet. However, the volatility of the game business and little surprises like the billion dollar band-aid make it difficult to put much reliance there.



Filed under Financial, General Business, Microsoft

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3 Responses to “Microsoft 4Q07 earnings meet expectations”

  1. Pajamas Media Says:

    The Battle of the Balance Sheets:

    Google and Microsoft announce their earnings. “This is weird,” says IP Democracy, “Google’s growth is cooling.” Microsoft on the other hand, met market expectations. Blogging Stocks explains where Microsoft’s growth is coming from….

  2. Tune into the Microsoft Financial Analyst Meeting 2007 -- Microsoft News Tracker Says:

    [...] While we are on the subject of Microsoft financial results, I was trying to put my finger on why I found Microsoft’s 4Q results so unsatisfying when I spotted (via MSFTextrememakeover) this observation from independent financial analyst Trip Chowdhry that summarizes it succinctly: [...]

  3. Can Halo 3 redeem the Xbox 360? -- Microsoft News Tracker Says:

    [...] Since E&D dropped about $200 million last quarter if you exclude the billion dollar band-aid, it certainly is possible. Of course, it begs the question of how long it would take Halo 3 to pay off the billion dollar band-aid as well, but it’s hard to consider Microsoft’s Xbox program as any sort of investment without a very long term view. [...]

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