This summary is based on the first quarter fiscal 2008 earnings call conducted by Microsoft Corporation (MSFT) on October 25, 2007.
Chief Financial Officer, Senior Vice President - Finance and Administration: Christopher P. Liddell
General Manager, Investor Relations: Colleen Healy
Key Investors Issues
- Earnings per share increased to 45 cents from 35 cents in the prior year.
- Quarterly revenue rose 27% over last year to $13.8 billion.
- For fiscal 2008, the firm projects revenue to range between $58.8 billion and $59.7 billion.
First Quarter Fiscal 2008 Financial Highlights
Revenue increased 27% to $13.8 billion, significantly exceeding the firm’s expectations by over $1 billion.
Every business grew at double-digit rates, with particular strength in client, the business division, and server and tools, which grew in excess of 20% combined, as well as growth of over 90% by entertainment and devices division. The underlying PC hardware market was strong, with estimated growth of 14% to 16% during the quarter, about three points higher than expectations. From a customer segment standpoint, the business PC shipment growth rate increased almost three times to over 12%, while continuing to be outpaced by the consumer segment.
From a geographical point of view, PC growth rates in emerging markets continued to outpace that of mature markets, driven by robust growth in Brazil, Russia, India, and China, which grew a combined 20%. Europe and Canada led the mature markets, while Microsoft began to see recovery in the U.S. and Japan.
The mix of product billings for the quarter was approximately 35% from OEMs, 25% from multi-year agreements, 20% from license-only sales, and the balance from other businesses.
Non-annuity sales were particularly robust, which is consistent with the post product launch stage for Windows Vista and the 2007 Office system. Strong annuity licensing performance with enterprise agreement renewal rates consistent with historical trends drove the unearned revenue balance 15% higher to $11.6 billion.
The contracted and not billed balance increased sequentially to over $11 billion. When taken together with reported revenue, total booking for the company grew an impressive over 30%.
The changes in foreign exchange rates added about two percentage points to the overall revenue growth and was slightly above forecast heading in to the quarter.
Cost of revenue increased three points to 19% of sales.
This was primarily driven by the high volume of X-Box 360 unit sales, increased consulting business, and expanded online services operations.
Operating expenses increased 11%, dropping from 43% of sales to 38% of sales.
Expense growth was largely in line with headcount growth and is tracking to the firm’s expectations, despite the higher-than-expected revenue generated during the quarter.
- Operating income grew faster than revenue at 32% to $5.9 billion, exceeding high-end guidance by $750 million and expanding operating margin by two percentage points.
- Investment income and other totaled $298 million for the quarter.
- The effective tax rate for the quarter was 31%, half a point higher than the firm had previously guided.
- Cash flow from operations increased 45% to $5.9 billion. Cash flow from operations outpaced operating income due to collections on the large volume of business close at the end of the fiscal year.
- During the quarter, the firm repurchased 81 million shares, or $2.3 billion of company stock and paid out $938 million in dividends to shareholders in the quarter.
- Diluted shares outstanding for the quarter were 9.5 billion, down 5% from the prior year as a result of share repurchases.
- Earnings per share for the quarter were 45 cents, assisted by the ongoing share buy-back program.
Analysis of Business Segments
