This summary is based on the third quarter fiscal 2008 earnings call conducted by Microsoft Corporation (MSFT) on April 24, 2008.
Senior VP & CFO: Chris Liddell
General Manager IR: Colleen Heally
Key Investors Issues
- The earnings per share for the quarter were 47 cents.
- Quarterly revenue increased 14% over last year to $14.5 billion.
- During Q3, the firm repurchased 30 million shares or $1 billion of company stock.
- For fiscal 2008, the firm expects EPS in the range of $1.87 to $1.90.
Third Quarter Fiscal 2008 Financial Highlights
Earnings per share for the quarter were 47 cents.
This was 2 cents to 4 cents above the guidance after adjusting for the offsetting impacts of the 15 cents EPS charge from the European commission fine and the 15 cents benefit from the resolution of the tax examination.
Revenue for the quarter was $14.5 billion.
Adjusting the year-ago quarter by the $1.7 billion of revenue recognition primarily related to the technology guarantee programs from Windows Vista and Office 2007 total revenue grew 14%. Revenue growth was driven by continued enterprise customer demand for the firm’s core products as well as consumer demand for products and services in the entertainment and devices division and online services business. The firm estimates PC unit growth rates moderated from January expectations by a couple of points in mature markets partially offset by an extra point of strength in emerging markets, resulting in an estimate of approximately 8% to 10% for the entire PC market during the quarter.
The firm’s mix of product billings for the quarter was approximately 30% from OEMs, 30% from multi-year agreements, 25% from license only sales and the balance was from other businesses. Annuity sales mix continued to increase on both a year-over-year and sequential basis while enterprise agreement renewal rates were in line with historical trends. As the firm guided, its unearned revenue balance was consistent with historical seasonality patterns and remained roughly flat on a sequential basis at $12.1 billion, up 18% year-over-year.
The contracted not billed balance remains above $11.5 billion and increased sequentially up well over $1 billion from where the firm started the fiscal year. When taken together with reported revenue, total bookings for the company grew 14%.
Client revenue of $4 billion was down 24% or down 2% adjusted for the tech guarantees.
Adjusting that further for a retail launch bump from last year client revenue would have been up 4%. During the quarter, OEM license units increased by 5%, about four points than the overall hardware market. The management believes that this reversal of the OEM unit trend outpacing that of the PC market was primarily driven by three factors.
- Last year, OEMs particularly in the system builder channel rebuilt inventory levels following the launch of Windows Vista driving OEM unit growth over 20% during that quarter and making it a tough comp.
- Inventory levels at OEM partners this year were higher than normal exiting fiscal Q2 impacting this quarter’s purchases.
- The firm believes that there was an increase in shipments of unlicensed PCs particularly in Asia. While the firm generally feels good about the gains it is making in piracy for the year, piracy is a tough battle in an area where it will need to continue investing in order to make progress.
The PC market growth was up 12% to 14% year to date, with OEM license units growing about a point faster, which is in line with historical rate of progress against piracy.
OEM revenue declined 25% but grew a point when normalized for the tech guarantees in the prior year. The four percentage difference between OEM license unit growth and revenue growth was caused by two roughly equivalent factors; mainly the increasing volume in emerging markets and a channel shift to large OEMs from the system builder channel. Partially offsetting these impacts was in increase in premium mix. Premium mix grew five points during the quarter to 76%, driven by an increase in the consumer element of the mix while the business portion was unchanged. The remaining roughly 20% of client revenue comes from the commercial and retail licensing portion of the business, which declined 18% or was down 13% after adjusting for tech guarantees. Normalizing last year’s Windows Vista launch bump at approximately $225 million, growth would have been up 23%. The firm continues to see healthy growth in the commercial portion of the business as sales of software assurance were once again strong as evidenced by the 29% in the client volume licensing portion of the unearned revenue balance. Since the launch of Windows Vista, revenue for the client business has grown 16% with a license growth rate of one to two points above that of the PC hardware market. Over 140 million licenses of Windows Vista have been sold to date and Service Pack 1 was released in the quarter.
The server and tools revenue of $3.3 billion represented an increase of 18%, marking its 23rd consecutive quarter of double-digit growth.
Customers continue to gravitate towards premium versions of Windows Server and SQL Server as well as to annuity contracts. The increased billing mix of annuity contracts drove the unearned revenue balance for the division up by over 35% versus last year. The consulting and support services revenue increased 24%, as the firm has experienced high demand following the recent launches across its product lines. The third quarter also marked the launch activities of the new versions of its flagship products in the server and tools division, namely Windows Server 2008, SQL Server 2008 and Visual Studio 2008. These products bring powerful new tools to customers and partners looking to turn their IT departments into a strategic asset. For example Windows Server 2008 with virtualization technology will help customers increase reliability and flexibility of their server infrastructure, reduce costs and increase security.
Online services business grew revenue 40% to $843 million, including $143 million from the addition of aQuantive.
Online advertising grew 39% or was up 29%, excluding the $47 million of ad revenue from aQuantive. The firm’s online audience continues to grow. Live IDs increased to 18% to 448 million while usage deepened with search queries and page views up from the prior year. In the quarter, the Microsoft announced a number of acquisitions including Caligari for collaborative 3D modeling, YaData for customer micro segment management, and Rapt for behavioral targeting.
Microsoft business division revenue was $4.7 billion, down 2% but up 9% adjusted for tech guarantees in fiscal year 2008.
