This summary is based on the fourth quarter fiscal 2007 earnings call conducted by Microsoft Corp. (MSFT) on July 19, 2007.
Chief Financial Officer: Chris Liddell
Corporate VP and CAO: Frank Brod
Deputy General Counsel: John Seethoff
Investor Relations: Colleen Healy
Key Investors Issues
- The earnings per share increased to 31 cents from 28 cents in the prior year.
- Quarterly revenue grew 13% over last year to $13.37 billion.
- For fiscal 2008, revenue is projected in the range of $56.8 billion to $57.8 billion.
Fourth Quarter Fiscal 2007 Financial Highlights
The diluted earnings per share for the quarter were 31 cents.
Excluding 8 cents of charges primarily related to Xbox 360 warranty policies, earnings per share would have been 39 cents, an increase of 26% over the same period of the prior year when also adjusted for certain items.
The company had revenue of $13.37 billion, a 13% increase over the same period of the prior year.
The growth in revenue was driven by client, Microsoft business division and server and tools division. Online services also had a good quarter. Each of these four businesses grew in the mid to high teens, and collectively at 16%.
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Client revenue grew 14% to $3.8 billion, characterized by strong OEM revenue growth, driven by continued demand for Windows Vista and a healthy PC hardware market.
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OEM revenue increased 15% and includes 3 points of revenue recognition from undelivered elements. Adjusting for this impact, OEM revenue grew roughly in line with OEM unit shipments at 11%. OEM premium mix was 72%, a 17 percentage point increase over this period last year. This was driven by a 20 percentage point increase in the consumer element of premium mix, and around a 3 percentage point decline in the business element. Given the over 5:1 pricing uplift the company received from the business premium SKUs over consumer premium SKUs, these changes within the premium mix have largely an offsetting impact to revenue.
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Client, commercial and retail licensing revenue increased 7%. Businesses are recognizing the value that Windows Vista and Software Assurance provides them, as evidenced by high renewal and new annuity attach rates, driving about a 25% increase in the volume licensing portion of the unearned revenue balance.
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Server and tools revenue grew 15% to $3.1 billion, driven by SQL Server, Windows Server, Visual Studio and consulting services revenue. Fiscal 2007 capped a decade of consecutive years of double-digit revenue growth for SQL Server. During the quarter, significant product development momentum was achieved with beta releases of the upcoming versions of Windows Server and Visual Studio, and a community technology preview of SQL Server 2008.
- In
online services business, the firm saw advertising revenue growth of 33%, exceeding the company’s expectations. Search ad revenue benefited from both increased search queries and revenue per search, while display ad revenue enjoyed both increased number of page views and revenue per page view. Overall, online services business revenue grew 19% to $688 million.
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Microsoft business division revenue grew 19% to $4.6 billion, beating high end guidance by over $150 million. Highlights in the quarter included solid revenue growth through enterprise agreements for Office, and continued momentum for Share Point. Enterprise agreement momentum continued after the launch of the Office 2007 system, and renewal rates are higher now than they were a year ago.
- The company’s
Dynamic business showed healthy performance across both the ERP and CRM product lines, driving a 24% increase in dynamic customer billings. An impressive 85,000 new seats of dynamic CRM offering were sold during the quarter.
- Consistent with the guidance,
entertainment and devices revenues decreased 10% to $1.2 billion, as a result of lower Xbox 360 sales. Software and accessory attach rates remained at record levels, and the firm passed the 7 million member mark for Xbox Live.
During the quarter, Halo 3 concluded beta testing, and on September 25th will lead the charge of hotly anticipated game titles into this 2007 holiday season. Entertainment and devices achieved its goal of selling over 1 million Zune units on a sell-in basis in its first eight months in the market.
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Licenses for Windows Mobile-based phones grew in excess of 75% to end the year with sales of over $11 million, and an increased unit market share in the smart phone category.
The positive revenue increased 52%, primarily driven by a charge relating to the current and enhanced Xbox 360 warranty policies that were announced earlier this month.
- The total amount of charge was $1.06 billion, within the range provided a couple of weeks ago.
- The makeup is largely consistent with the guidance provided with about half of the total charge driven by existing warranty policies and the other half driven by the new warranty enhancements. Of the total amount of the charge, approximately 35% is attributable to inventory valuation adjustment. Before the Xbox 360 charge, cost of revenue would have increased 5% year over year.
The underlying PC hardware market remained robust, with estimated growth of 11% to 13% during the quarter, about a point higher than the firm’s expectations.
PC shipment growth rates in emerging markets continue to outpace that of mature markets, and consumer PC shipment growth outpaced that of the Business Segment. Every region, except the US and Japan, increased PC shipments at double-digit rates.
The company’s mix of product billings for the quarter was approximately 30% from OEMs, over 40% from multi-year licensing agreements, around 15% from license-only sales, and the balance from other businesses. Over the past couple of years, the company has seen a mix shift from license-only sales to annuity agreements, driven by standing adoption of enterprise agreements. Enterprise agreement renewal rates exceeded the high end of the historical range of 66% to 75%. The firm is delighted that the value proposition from the current product lineup and future roadmap - beyond the recently launched flagship desktop product - are resonating with customers.
