This summary is based on the second quarter earnings call conducted by Microsoft Corp. (MSFT) on 22 January, 2009.
Management:
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CEO : Steve Ballmer
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SVP & CFO: Chris Liddell
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General Manager, IR: Bill Koefoed
Key Investors Issues
- Net income was $4.17 billion or 47 cents a share, down 11% from $4.7 billion or 50 cents a share in 2007.
- Revenue grew 2% to $16.6 billion from $16.4 billion in the prior year.
- Firm repurchased 94 million shares or over $2.2 billion of company stock
Second Quarter Highlights:
Revenue grew 2% to $16.6 billion from $16.4 billion in the prior year as the economic environment weakened further than expected, particularly in the month of December.
- The mix of product billings was approximately 30% from OEMs, 25% from multi-year licensing agreements, 20% from license only sales, and the balance from other businesses.
- Despite the broad economic weakness, the annuity portion of volume licensing business remains healthy and increased one percentage point in the billing mix.
- Unearned revenue grew over 7% to $13.1 billion but was down sequentially and contracted not billed balance increased 10% year over year but was slightly down on a sequential basis remaining at over $13 billion.
- Total bookings for the company declined 10% this quarter, reflecting the general economic weakness, primarily in our non-annuity business.
Cost of goods sold was $3.9 billion, increasing as a percentage of revenue two percentage points to 23.5%.
- Cost of goods sold growth was driven by higher Xbox 360 console volumes, increased data center and traffic acquisition cost in the online services business and growth in enterprise services.
- Net income was $4.17 billion or 47 cents a share, down 11% from $4.7 billion or 50 cents a share in 2007 due to higher costs.
Operating expenses were $6.8 billion, over $600 million less than assumed in the low end guidance, representing a significant slowing in the operating expense growth rate.
- Other income and expenses was a loss of approximately $300 million, driven by currency evaluation declines on unhedged portions of the balance sheet and investment impairments, offset by dividends, interest and net recognized gains on investments sold.
- The firm repurchased 94 million shares or over $2.2 billion of company stock and also paid out about $1.2 billion in dividend to shareholders.
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Client revenue declined 8% to $4.0 billion as the PC market weakened much more quickly and severely than expected.
- Traditional PCs declined almost 10% with weakness in both consumer and business PCs, partially offset by incremental growth in the new notebooks category.
- Windows OEM licensed units declined by 1%, OEM revenue was 12% lower year over year driven primarily by the dynamics of the underlying PC market.
- The decline in traditional PC sales drove double digit declines in business and consumer premium SKUs, partially offset by strong growth in notebooks offering.
- The notebook attach rate now exceed 80% as customers are clearly opting for the value Windows provides.
The commercial and retail portion of the client business grew 19% as it benefited from continued adoption of Windows Vista in the enterprise.
- On the product front, the engineering team reached a major milestone with the delivery of the public beta of Windows 7, which has received great reviews to-date.
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Server and tools revenue grew 15% to $3.7 billion despite a declining server hardware market.
- Annuity licensing continued to grow faster than non annuity licensing while the momentum of SQL Server 2008 and Hyper-V virtualization helped drive Windows server sales and increase ystems center management tools attach rate.
- Demand for consulting and support services to deploy Microsoft technology remained strong, driving revenue growth at 16%.
On the product side, the server and tools division released to beta, Windows Server 2008 R2 will add the Live migration feature to Hyper-V, further enhancing virtualization offering.
- Azure, hosted in Microsoft data centers provides an operating system and a set of developer services that can be used to build new applications to run from the cloud or enhance existing applications with cloud based capabilities.
- This architecture gives developers the choice to build web applications, applications running on connected devices, PCs, servers or hybrid solutions, while using the same tools they use today.
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Online services business revenue was relatively flat at $866 million and online advertising revenue grew 7%.
- Search revenue grew double digits while display revenue grew slower in a weak ad spending market.
- The firm continues to see healthy growth in traffic with page views and query searches both up on a sequential and year over year basis.
- In the online services business, we recently announced important partnerships with Dell, Verizon, and Sun Microsystems, and released a new suite of Windows Live services.
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Microsoft business revenue was up 1% to $4.9 billion and business revenue grew 7%, driven by continued strength of the annuity business across Office, SharePoint and Client Access licenses suites, and benefited from strong deferred revenue recognition.
- Non annuity revenue declined on weakness in the mid market, small medium business and consumer segments.
- Consumer revenue declined 23% driven by the weakness in the core PC market, a mix shift to lower price SKUs and inventory reductions.
- Progress against the product pipeline included releasing final versions of Exchange Online and SharePoint Online.
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Entertainment and devices division revenue grew 3% to $3.2 billion, a record 6 million consoles were sold in the quarter growing over 41%.
- In Europe, Xbox 360 sales nearly doubled those of previous holiday season and based on US NPD numbers released last week, Xbox 360 outsold PS3 two one.
- The company also launched the new Xbox Experience, which has given customers a new upgraded experience that broadens its appeal and increases the value and durability of the platform to customers and Microsoft.
