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October 27, 2005

Microsoft earnings present a mixed bag

Posted by David Hunter at 5:57 PM ET.

Ina Fried at CNET:

Microsoft on Thursday reported first quarter earnings just ahead of Wall Street estimates, though the company’s sales and current quarter forecast fell short of expectations.

More by following the link and in the press release:

Revenue and operating income growth for the quarter were driven by healthy demand for Microsoft’s core platform software and by growth in PC and server shipments. Server and Tools posted double-digit year-over-year revenue growth for the quarter, propelled by strength in its flagship products Microsoft® SQL Server, Exchange Server and Windows® Server. SQL Server showed particular strength, posting greater than 15% revenue growth over the comparable quarter in the previous year. Mobile and Embedded Devices revenue was up more than 50% due to continued adoption of Windows Mobile® software.

The Microsoft Investor Relations Home Page has more details including segment information:

Three Months Ended
September 30
Operating Income / (Loss) 2005 2004

Client $2,576 $2,401
Server and Tools 896 699
Information Worker 1,934 1,908
Microsoft Business Solutions (12) (31)
MSN 83 80
Mobile and Embedded Devices (2) (29)
Home and Entertainment (141) (138)
Other (1,288) (1,396)

  Total operating income

$4,046 $3,494

The 10-Q provides explanations and I have some selected quotes below. As usual, the three cash cows (Client, Server and Tools, and Office) lead the way although Client did not keep up with PC shipments:

Client revenue increase for the first quarter of fiscal year 2006 was driven by an 18% growth in OEM license units and $319 million or 13% growth in OEM revenue from increased PC unit shipments partially offset by a $106 million or 19% decrease in revenue from commercial and retail licensing of Windows operating systems. This channel mix reflects our customers’ continued preference for upgrading their PC operating systems through the OEM channel when they replace their PCs versus the purchase of a multiyear licensing agreement.

and Office (Information Worker) was flat. Among the others, MSN was surprisingly flat until you read the details:

MSN revenue remained almost flat for the first quarter of fiscal year 2006 primarily due to a decline of $62 million or 30% in Internet Access revenue, as subscribers migrate to broadband or other competitively priced Internet service providers. Advertising revenue increased $60 million or 20% from the previous year due primarily to strong growth in display advertising on our portals, channels, email, and messaging services throughout the world.

At the end of the first quarter of fiscal year 2006, MSN had 2.6 million internet access subscribers compared with 3.8 million at September 30, 2004 and 9.4 million total subscribers compared to 9.1 million at the end of the first quarter of prior year.

MSN operating income increased slightly for the three months ended September 30, 2005 due to lower operational costs related to Internet Access and lower customer-acquisition-related spending, partially offset by an increase in sales and marketing and research and development costs.

Finally, the drop at Home & Entertainment was due to the Xbox 360 ramp:

Home and Entertainment operating loss in first quarter of fiscal year 2006 increased primarily due to an increase in Xbox 360 product design, development and sales and marketing expenses related to launch marketing and a reduction in Xbox game revenue. The increase in operating loss was partially offset by lower console volumes and lower console costs. Historically, Xbox consoles have negative gross margins.

The console business is a funny business.

Filed under Financial, General Business

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2 Responses to “Microsoft earnings present a mixed bag”

  1. Microsoft News Tracker » Blog Archive » Microsoft Korea Kerfuffle Says:

    [...] In last week’s Microsoft 10-Q report to the SEC reporting 1st (fiscal) quarter results there was the following note: The Korean Fair Trade Commission (“KFTC”) has been investigating whether our inclusion of streaming media technology or instant messenger technology in Windows, or the inclusion of Windows Media Services as an optional component of Windows Server, violates the Korean Fair Trade Law. The KFTC has been conducting hearings periodically since July 2005. The KFTC could enter a remedial order that could bar us from offering a version of Windows in Korea that included media or messenger technologies or bar us from offering Windows Server with Windows Media Services as an optional component. If the KFTC enters an order requiring Microsoft to remove code or redesign Windows uniquely for the Korean market, it might be necessary to withdraw Windows from the Korean market or delay offering new versions in Korea unless the remedial order is stayed or overturned on appeal. [...]

  2. Microsoft News Tracker » Contrarian Predictions for Microsoft in 2006 Says:

    [...] Reading some of the 2006 predictions for Microsoft, I’ve been struck by how many concern issues that are largely ephemeral to Microsoft’s financial performance. I enjoy the latest technical buzz as much as anyone, but I think that occasionally a “green eye shade” view is in order. To that end, here are some predictions for Microsoft in 2006 that are contrary to the usual flow of techie chatter, but for which I believe a reasonable case can be made. They are intentionally ordered by recent Microsoft business unit profits. [...]

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