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January 25, 2007

Microsoft profits tank, blames pesky coupons

Posted by David Hunter at 10:05 PM ET.

John Letzing at MarketWatch:

Microsoft Corp. late Thursday reported a 28% drop in quarterly profit as the world’s largest software company was hurt by the delayed release of Vista, the newest version of its flagship Windows program.

Microsoft said it earned $2.63 billion, or 26 cents a share, for its fiscal second quarter ended Dec. 31, compared to $3.65 billion, or 34 cents, a year earlier.

Sales rose 6% to $12.54 billion from $11.84 billion, helped by higher sales of server software and stronger-than-expected demand for Microsoft’s Xbox 360 video game player.

The results, which reflected the deferral of $1.64 billion in sales and 11 cents a share in earnings related to a Vista marketing program, still beat Microsoft’s own forecast and the expectations of Wall Street analysts.

It should be “still beat the already reduced expectations”, as I mentioned earlier today.

The earnings report is here, but we don’t have to be constrained by annoying accounting artifacts, so here are some segment one liners with the raw numbers from Microsoft’s 10-Q neatly augmented by deferrals where appropriate:

Client:


(millions) % change 2Q07 2Q06

Revenue %(25) $2,589 $3,430
Operating Income (29) 1,880 2,661

Add back in the $1.1 billion of Client revenue that was deferred and you get $3.689 billion in revenue, a 7.6% increase which is a little below independent estimates of 4Q06 PC sales growth and Microsoft’s estimate of 8-10%. Microsoft says they actually sold 10% more units so it’s not an unmixed blessing.

Business (mostly Office):


(millions) % change 2Q07 2Q06

Revenue %(5) $3, 512 $3,689
Operating Income (11) 2,169 2,445

Add back in the $0.5 billion of Office revenue that was deferred and you get $4.012 billion in revenue, a 8.8% increase which, while not fantastic, is better than past quarters.

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


(millions) % change 2Q07 2Q06

Revenue %76 $2,964 $1,687
Operating Income (1) (289) (269)

Here’s $1.3 billion of increased revenue without any additional profits due to the usual suspects. No, not keyboards and mice.

Online Services:


(millions) % change 2Q07 2Q06

Revenue %5 $624 $593
Operating Income (367) (155) 58

Going nowhere even faster than usual due to increased headcount for “Windows Live, adCenter, and other properties” plus building datacenters.

Server and Tools:


(millions) % change 2Q07 2Q06

Revenue %17 $2,845 $2,438
Operating Income 35 1,032 767

The Rodney Dangerfield of Microsoft kicks butt and takes names yet again.

Bottom Line:

The oddity of the “deferral” aside, Microsoft’s cash cows came close to keeping pace with the overall market which was a bit better than last quarter while Server and Tools continued its winning ways. Entertainment and Devices and Online Services keep stinking out the joint. There wasn’t really a lot new here despite the Three Card Monte with the Vista and Office 2007 deferral.

Finally, Microsoft reported that there was $1.1 billion in net income deferred for Vista and Office 2007 but gave no break out. Adding that back in would give Client and Business in aggregate a little better than 0% income growth, but that is likely largely due to the expenses accompanying the new products.



Filed under Financial, General Business, Microsoft, OS - Client, Office, Office 2007, Windows Vista

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4 Responses to “Microsoft profits tank, blames pesky coupons”

  1. RandomSpot - Daily Hot News » Microsoft profits tank, blames pesky coupons Says:

    [...] “Microsoft Corp. late Thursday reported a 28% drop in quarterly profit as the world’s largest software company was hurt by the delayed release of Vista, the newest version of its flagship Windows program. Microsoft said it earned $2.63 billion, or 26 cents a share, for its fiscal second quarter ended Dec. 31, compared to $3.65 billion, or 34 cents, a year earlier. Sales rose 6% to $12.54 billion from $11.84 billion, helped by higher sales of server software and stronger-than-expected demand for Microsoft’s Xbox 360 video game player. The results, which reflected the deferral of $1.64 billion in sales and 11 cents a share in earnings related to a Vista marketing program, still beat Microsoft’s own forecast and the expectations of Wall Street analysts…” (Read full article here) [...]

  2. Downward guidance for Microsoft’s Xbox and online services -- Microsoft News Tracker Says:

    [...] I’ve belabored the numbers in the 2Q FY07 Microsoft earnings report, but some of the juiciest tidbits are in the forward looking guidance: [...]

  3. Microsoft 3Q07 earnings beat expectations on Vista and Office strength -- Microsoft News Tracker Says:

    [...] The good news was clearly driven by Vista and Office, but Microsoft oddly provided none of the usual commentary in the 10-Q report so it is hard to really get insight into the numbers. In any case, below are the segment breakouts with some brief commentary. Last quarter I indicated the effect of adding back in the deferred Vista and Office revenue mentioned above – correspondingly, I mention below the results for 3Q with the deferred revenue subtracted. [...]

  4. Microsoft beats the Street for 2Q08, raises outlook | Microsoft News Tracker Says:

    [...] 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%. Note also that foreign currency exchange rates added 3% revenue overall. [...]

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