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January 24, 2008

Microsoft beats the Street for 2Q08, raises outlook

Posted by David Hunter at 8:46 PM ET.

Microsoft beat Wall Street expectations today when it announced its fiscal 2Q08 results:

Microsoft Corp. said Thursday that earnings jumped 81% for the December quarter thanks mostly to strong sales of its Windows software, and the software giant raised its outlook for the full fiscal year ending in June.

Microsoft said net income for the period ended in December rose to $4.7 billion, or 50 cents a share, from $2.6 billion, or 26 cents a share in the same period a year earlier. Meanwhile revenue rose 31% to $16.37 billion.

Analysts on average have been estimating Microsoft would post earnings of 46 cents a share, on $15.95 billion in revenue for the quarter, according to Thomson Financial.

Based on strong second-quarter results, the company raised its outlook for the full fiscal year ending in June. Microsoft said it now expects earnings between $1.85 and $1.88 a share for the year, and revenue between $59.9 billion and $60.5 billion. Analysts have been expecting earnings for the full year of $1.81 a share, and revenue of $59.36 billion.

The company said its client unit, which includes Windows, posted a 68% gain in revenue in the second quarter, to $4.34 billion.

Note that the big gain for Windows client is partially due to the large revenue deferral a year ago, When that is added back in, the client revenue growth was only 18% and overall revenue growth was 15% instead of 31%. Note also that foreign currency exchange rates added 3% to revenue overall.

Below are the segment breakouts with some brief commentary based on the 10-Q.

Client:

(millions) % change 2Q08 2Q07

Revenue %68 $4,335 $2,586
Operating Income 83 3,358 1,838

As mentioned above, the big jump is due to $1.1B in revenue that was deferred in 2Q07.  Both OEM (80% of total) and commercial licensing revenue grew by 18% based on an uptick in PC sales and the “premium mix” growing eight percentage points to 75% compared to last year. Not surprisingly, Microsoft estimates that revenues will continue to track PC sales closely..

Business (mostly Office):

(millions) % change 2Q08 2Q07

Revenue %37 $4,811 $3,513
Operating Income 48 3,185 2,152

Office generates 90% of Business Division revenue and Office 2007 is doing well. The $500M revenue deferral in 2Q07 makes the growth seem bigger than it is.

Server and Tools:

(millions) % change 2Q08 2Q07

Revenue %15 $3,278 $2,843
Operating Income 19 1,172 981

Another solid quarter for Server and Tools who has major new products launching this fiscal year.

Entertainment and Devices (mostly Xbox):

(millions) % change 2Q08 2Q07

Revenue %3 $3,060 $2969
Operating Income - 357 (302)

Xbox console sales actually decreased (4.3M from 4.4M) but increases in sales of games, Xbox Live, and accessories lead to a 5% revenue increase. There’s no breakout of the other contributors (Zune, Windows Mobile, Windows Embedded, Mediaroom, Windows Automotive) but they must have been down to yield an overall 3% revenue increase. The good news is that the Xbox is finally in the black because of cost reduced consoles and reduced Xbox marketing. The bad news is that the Xbox business isn’t particularly profitable.

Online Services:

(millions) % change 2Q08 2Q07

Revenue %38 $863 $625
Operating Income %(108) (245) (118)

Online advertising revenue grew 38% ($170M) to $623 million including aQuantive’s $52 million. The acquisition of aQuantive also added $102 million in agency revenue. The fading MSN ISP business dropped %26 to $67 million.

So where did it all go? There were large write-offs and a loss from the acquisition of aQuantive plus increases in general expenses for infrastructure and headcount. The Online Services Business (OSB) is still very much in investment mode.

Corporate Level Activity (overhead and legal): 

(millions) % change 2Q08 2Q07

Corporate level results %(25) $(1,346) $(1,079)

Legal expenses were up by $126M. Headcount expenses were up %10 on a %6 increase in headcount.

Bottom Line:

Microsoft’s usual cash cows (Windows Client, Office, and Servers) came through again to produce a great quarter even when the year ago revenue deferral is removed. Entertainment and Devices is at least profitable if not much else, and Online Services still needs a lot of work.



Filed under Financial, General Business, Microsoft

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