This summary is based on the second quarter fiscal 2008 earnings call conducted by Microsoft Corporation (MSFT) on January 24, 2008.
Management:
Senior Vice President, CFO: Chris Liddell
General Manager Investor Relations: Colleen Healy
Key Investors Issues
- EPS were 50 cents per share compared to 26 cents per share last year.
- Net profit rose to $4.7 billion from $2.6 billion in the year-ago period.
- Revenue rose 30% to $16.37 billion.
Second Quarter Highlights
Revenues surpassed previous record high by $2 billion and at $16.4 billion that exceeded the high end of expectations by over $300 million.
The company is benefitting from the investments made over recent years plus excellent execution performance from field sales force. Revenue grew 30% or 15% adjusted for the technology guarantees in the comparable period last year.
Demand from enterprise customers combined with healthy holiday consumer spending for Windows Vista and the 2007 Microsoft Office system drove revenue for the business group a combined 18%.
- Server and tools, once again delivered double digit revenue growth, the 22nd in a row. Healthy enterprise agreements signings across the company drove unearned revenue balance up over $0.5 billion, $500 million above guidance.
- The successful integration of eQuantive acquisition plus good organic growth helped online business grow 38% and a compelling lineup of Xbox games drove performance for entertainment and devices division.
From a geographic perspective, over 60% of sales are from users in regions outside of the US.
- Revenue in those regions continue to drive growth for the company with non-US mature markets up over 20% for the first half of the year and emerging markets up nearly 30%.
- The company combined revenue growth with cost efficiencies resulting in operating income growth of 27%, even adjusted for the tech guarantees of last year.
- Operating margins were a healthy 40%.
- Earnings per share growth of 32% after adjusting for last year’s tech guarantee continued to benefit from the accommodation of strong operating performance and execution of share repurchase program.
Revenue is $16.4 billion, an increase of 30%.
Adjusting the year ago quarter by the $1.6 billion of revenue deferrals primarily related to the technology guarantee program for Windows and Office, total revenue grew 15%. With business and consumer PCs each experiencing double digit growth rates, the underlying PC hardware market increased an estimated 14%-16%, about 3 points higher than expectations. PC growth rates in emerging markets continue to outpace that of mature markets. Europe led the mature markets and the company saw significant improvement in the US and especially in Japan.
Mix of product billings was approximately 30% from OEMs, 30% from multi-year agreements, 20% from license only sales and the balance from other businesses. Annuities sales were robust, particularly for server and tools in anticipation of the major product releases scheduled for the second half. This combined with enterprise agreement renewal rates, consistent with historical trends, drove unearned revenue balance over $0.5 billion above guidance to $12.2 billion, up 20% year over year normalizing for the impact of the tech guarantee deferrals.
Contracted not billed balance increased sequentially to over $11.5 billion, up well over $1 billion from the start of the fiscal year. When taken together with reported revenue, total bookings for the company were almost 20%.
A robust personal computer market and progress against software piracy drove client revenues to $4.3 billion, up 68%, or 16% after adjusting for tech guarantees.
Over 80% of client revenue comes from OEM business. The company grew OEM unit shipments at 18%, approximately 3 percentage points faster than the overall hardware market. Curbing software piracy has been a significant investment area for the company over the last several years and those investments are paying off.
OEM revenue grew 80% or 18% when normalized for the tech guarantee and in line with OEM unit growth rate. In terms of premium mix, three out of every four Windows customers adopted premium versions. Consumer premium units grew over 50% while business premium units grew 12%. As a result, the OEM premium mix increased by 8 points to 75%, driven by an 11 point increase in the consumer element of the mix and offset by a 3 point decline in the business portion due to the pricing differences between business premium and consumer premium SKUs, these changes in the premium have largely offsetting impacts to revenue.
The commercial and retail licensing portion of the business increased 18%, up 8% adjusted for tech guarantees as business customers continue to add client products to their annuity agreements.
