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July 17, 2008

Microsoft 4Q08 earnings strong but fail to impress Wall Street

Posted by David Hunter at 6:24 PM ET.

Microsoft logo 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.

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:

(millions) % change 4Q08 4Q07

Revenue %15 $4,367 $3,809
Operating Income 16 3,228 2,778

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):

(millions) % change 4Q08 4Q07

Revenue %14 $5,263 $4,634
Operating Income 12 3,341 2,983

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:

(millions) % change 4Q08 4Q07

Revenue %21 $3,737 $3,084
Operating Income 39 1,373 987

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):

(millions) % change 4Q08 4Q07

Revenue %37 $1,575 $1,153
Operating Income 85 (188) (1,223)

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:

(millions) % change 4Q08 4Q07

Revenue %24 $838 $677
Operating Income (132) (488) (210)

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):

(millions) % change 4Q08 4Q07

Corporate level results %(19) $(1,582) $(1,326)

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.



Filed under Financial, General Business, Microsoft

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One Response to “Microsoft 4Q08 earnings strong but fail to impress Wall Street”

  1. Kevin Johnson out as Microsoft rearranges the online deck chairs | Microsoft News Tracker Says:

    [...] problem could have been Vista’s lackluster reputation, but Microsoft is still printing money with Windows so a more likely cause is the continuing disappointment from Microsoft’s online efforts. [...]

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