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October 26, 2008

Microsoft reports strong 1Q09, cuts outlook

Posted by David Hunter at 5:04 PM ET.

Microsoft logo Last week, Microsoft reported strong, if not blemish-free, financial results for the 1st quarter of fiscal 2009 (ending Sept. 30, 2008) and as expected cut its outlook for the 2nd quarter. The good news was that the outlook was not as dark as Wall Street had expected:

Technology investors are so tired of the drumbeat of bad news that has continued to roil tech stocks that they grasped at the tiniest bit of optimism in Microsoft Corp.’s predictions for its second quarter.

Microsoft said in its fiscal first quarter earnings report that it expects to see second quarter revenues in the range of $17.3 billion to $17.8 billion, while analysts had previously been forecasting revenues of about $17.9 billion. But because its lowered forecast was not as bad as the worse case scenario feared on Wall Street, the stock ended up getting a small boost in after-hours trading.

As for 1Q09 itself, earnings per share were 49 cents beating the analyst consensus of 48 cents.  Still, there were some distinct oddities revealed in the segment results as discussed below with quotes from the 10-Q filing.


(millions) % change 1Q09 1Q08

Revenue %2 $4,218 $4,139
Operating Income (4) 3,267 3,388

Since the estimated PC shipment growth rate was 10-12%, the big question is where did all the money go? Microsoft merely states:

Client revenue increased reflecting growth in licensing of Windows Vista. Revenue from commercial and retail licensing of Windows operating systems increased $125 million or 22%. OEM revenue decreased $46 million or 1% while OEM license units increased 8%. The decline in OEM revenue reflected the four percentage point decrease in the OEM premium mix to 71% as well as changes in the geographic and product mixes.

I’d conjecture that piracy, Apple, and netbooks (running Windows XP) all played a part, but the bottom line is that Windows revenue grew markedly less than the PC shipment rate which is not good news. Beyond that, income growth was negative due to increased expenses included a 20% increase in R&D expenses that was headcount-related. Not a disaster, but not a pretty picture either.


Business (mostly Office):

(millions) % change 1Q09 1Q08

Revenue %20 $4,949 $4,117
Operating Income 23 3,311 2,700

Old reliable Office brought home the bacon with the help of $214 million from currency exchange rates. Of note is that, "Consumer revenue increased $288 million or 36%, reflecting increased sales primarily due to promotional pricing programs for the 2007 Microsoft Office system." Expenses increased apparently mostly driven by the troubled acquisition of FAST.


Server and Tools:

(millions) % change 1Q09 1Q08

Revenue %17 $3,406 $2,900
Operating Income 20 1,151 959

Server and Tools continued its winning ways helped out by $119 million growth in revenue from the low margin consulting and Premier and Professional product support services.


Entertainment and Devices (mostly Xbox):

(millions) % change 1Q09 1Q08

Revenue %(6) $1,814 $1,929
Operating Income 7 178 167

I have to quote extensively for this odd tale:

Xbox 360 platform and PC game revenue decreased $331 million or 22%, primarily as a result of the $330 million of incremental revenue from the launch of Halo 3 in the first quarter of fiscal year 2008 and decreased revenue per Xbox 360 console as a result of price reductions during the past 12 months. We shipped 2.2 million Xbox 360 consoles during the first quarter of fiscal year 2009, compared with 1.8 million Xbox 360 consoles during the first quarter of fiscal year 2008. Other EDD product revenue increased $216 million or 51%, led by increased sales of application software for Apple’s Macintosh computers, the Zune digital music and entertainment platform, and mobile and embedded device platforms.

That has to be Mac Office, which somehow found its way to shoring up the Entertainment and Devices bottom line.

For the remainder of fiscal year 2009, we expect revenue to be flat or to decrease relative to the prior fiscal year due to year-over-year variations in launches, volumes, mix, and prices across our portfolio of products and services. We expect sustained profitability for fiscal year 2009.

Undoubtedly marginal, low growth profitability even adding in Mac Office.


Online Services:

(millions) % change 1Q09 1Q08

Revenue %15 $770 $671
Operating Income (80) (480) (267)

Online advertising revenue grew 15% ($72M) and aQuantive agency revenues nearly doubled to $98M, but cost of revenue increased by $251 million "primarily driven by increased data center and equipment costs and other expenses ate up that and more. The outlook was for more of the same.


Corporate Level Activity (overhead and legal):

(millions) % change 1Q09 1Q08

Corporate level results %(30) $(1,428) $(1,098)

No particular item of corporate overhead was called out for the whopping big increase.

Bottom Line: By and large it’s the usual Microsoft story except for the weakness in Client results. Entertainment and Devices continues to underperform Microsoft’s software businesses and the Online Services sinkhole can only be justified as "building for the future."

Filed under Acquisitions, Financial, General Business, Microsoft, Office, Office for Mac

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