- Operating income was $5.7 billion, up 42% or 13% after adjusting for the impacts of the warranty related charge in the year-ago period. Investment income and other totaled $284 million, as the Microsoft treasury team continues to successfully navigate a challenging capital market environment.
- Effective tax rate was 28%, a couple points lower than expected, driven by an earnings mix increase in lower tax jurisdictions.
- The company repurchased 171 million shares, or almost $5 billion of company stock, and paid out about $1 billion in dividends to shareholders.
- Shares outstanding were $9.4 billion, down 3% from the prior year, as a result of share repurchases. Earnings per share were 46 cents, in line with guidance and growing 48%, or 18% after adjusting for the warranty related charge in the prior year.
First Quarter 2009 Outlook
- The company expects PC unit to remain healthy with growth rates similar to those in 2008. Specifically, the company expects PC unit growth to be 10% to 12%. The company estimates that growth rates will continue to be driven by 20% growth in emerging markets, with high-single-digit growth in mature markets.
- The company expects revenue of $14.7 billion to $14.9 billion, which represents an increase of 7% to 8%.
- Server and tools revenue should be up 19% to 20%.
- The company forecasts revenue in the online services business to increase 7% to 11%. The advertising component of revenue is expected to grow at approximately 15%.
- Guidance assumes the continuation of the challenging online advertising market experienced in the fourth quarter. The company expects revenue growth will accelerate through the year as it begins seeing returns from the additional investments it is making in the business.
- Business division revenue should be up 15% to 16%.
- For the entertainment and devices division, the company expects revenue to be down 23% to 26%.
- The company expects operating income to be between $5.9 billion and $6 billion.
- The company expects earnings per share of 47 cents to 48 cents, and these earnings assume an effective tax rate of 28%.
Fiscal 2009 Outlook
- The company expects PC unit to remain healthy with growth rates similar to those in 2008. Specifically, the company expects PC unit growth to be 12% to 14%. The company estimates that growth rates will continue to be driven by 20% growth in emerging markets, with high-single-digit growth in mature markets.
- The company expects revenue to come in between $67.3 billion to $68.1 billion, growing 11% to 13%.
- Revenue guidance by business group is as follows: for client, the company expects growth to be 9% to 10% and Q1 growth to be 6% to 7%. The PC market growth will outpace that of client revenue because of a continuation of the underlying PC market dynamic, namely emerging market PC growth outpacing mature markets, consumer growth exceeding business growth, and the shift in the system build channel to large OEM.
- Server and tools revenue should be up 18% to 19%.
- The company forecasts revenue in the online services business to increase 18% to 20%. The advertising component of revenue is expected to grow at approximately 25%.
- Business division revenue should be up 14% to 15%.
- For the entertainment and devices division, the company expects revenue to be down 4% to flat.
- Operating income is expected to be between $26.3 billion and $26.9 billion, increasing 17% to 20%, or 10% to 12% excluding certain tax and legal charges in fiscal 2008.
- Earnings per share are expected to come in at $2.12 to $2.18, representing growth of 13% to 17%, two to four points faster than revenue.
- From a balance sheet perspective, the company expects total unearned revenue to finish fiscal 2009 up 8% to 9%.
Key questions from the fourth quarter earnings call conducted by Microsoft Corporation on July 17, 2008.
Sara Friar (Goldman Sachs): Could you give your overview on the macro environment and how that has changed when you think back to give earnings three months ago?
Christopher P. Liddell: The macro environment broadly speaking is the same as what we were expecting in April. People are getting concerned now about the length of softness here in the U.S., but as you have seen for revenue, we have taken it up since April, so in terms of the visibility into our products, we are feeling good about our position, not only here in the U.S. but outside the U.S. If you look at the company overall, our sales in the U.S. in the year that we just completed were up 15%. The company overall is up 18% so we grew faster outside the U.S. than we did inside the U.S., but at 15%, given it has been a difficult environment for a number of companies, growing at 15% off our base was good. Going into next year, we are cautious like everyone is about the impact of the environment but for our products overall, we are feeling good. I would say the one proviso to that is in the online advertising space, where we are seeing a direct impact. It was weak in the fourth quarter and you are seeing from results of other companies as to the weakness in that general space. There is a direct impact and we are not immune to that in the online space and we will see that continuing for the next quarter. Overall in terms of our core business growth, it feels good.
Sara Friar (Goldman Sachs): Your cash flow came in weaker than we were anticipating. DSOs were up higher than you have ever seen for Microsoft. Was there a collections issue, more back-end loading?
Christopher P. Liddell: The biggest thing in the cash flow that was a negative was the payment of the fine to the E.U., which was over $1.5 billion, so that was a big negative from a cash flow point of view. Other than that, there was not anything remarkable from a cash flow point of view. In fact, it was a strong quarter, given the results overall.
Heather Bellini (UBS): If you are unsuccessful in getting all or even a part of Yahoo!, how you are going to be able to compete with Google?
Christopher P. Liddell: Regardless of what happens with Yahoo!, it is a space that we are committed to. I said that in the prepared remarks and it is one that we are committed to on a long-term basis. I would split the market, as I did in my prepared remarks, into four areas, of which search is only one - ad platform, communications, central networking, and information content being the other ones, and we have a good position in information content and communications in an ad platform with the acquisition of aQuantive. We feel good about our relative position in those areas and a number of our investments are going into that. The search area is the one where, relatively speaking, we are the most behind and that is why we are taking a different approach. We are focusing in particular on the areas of search where there is a strong commercial intent, our verticals like retail, travel, real estate, local. We are looking at different approaches where we might potentially take a disruptive and innovative business model, for example, Cashback, and then looking at winning distribution deals. Now in the short-term, that is not going to make the division profitable and from our guidance, that is not the case. If you look at the operating margin structure of the company, you have to look at the three distinct businesses. We feel good about the margin structure for our core businesses in particular growing double-digit revenue on. Entertainment and devices will be broadly flat but online is going to be negative.
Heather Bellini (UBS): You are performing well on the top line but your spending the upside so that people are not getting margin expansion. How long do you expect that to continue?
Christopher P. Liddell: We are not going to give guidance for fiscal year 2010 and 2011. Some of these investments that we are making will be multi-year, so it will depend to a large extent on our revenue growth as to when that division becomes profitable. It will need to continue to grow relatively substantially in order to cover the level of investments that we are making, but it is going to be an investment in the area, in particular things like the ad platform, where we see it converging to two natural players over time, of which we would expect to be one, and that is an area where spending in particular on infrastructure is likely to be high. I can not promise you that you are going to see a massive turnaround in the short-term, and in fiscal year 2009, which is the year that we are guiding to today, it is going to be a continuation of an investment. But again, put it in the context of what we would describe as the overall opportunity and the size of the company overall.
Charles Di Bona (Sanford C. Bernstein): You have had an issue about being disappointing on margins. Can you give color on what looks to be a persistent control issue in fourth quarter and in some cases it looks like you might be pulling some of the expenses forward?
Christopher P. Liddell: I always distinguish between the costs, which were, if you like, a function of the revenue, a function of decisions that we made, and functions of unexpected low quality spend. On the revenue side, we sold more Xboxes, so we had more COGS. That is good news. We do not make any money from those but overall in terms of long-term health of the business, the more consoles we sell, the better. In server and tools, the higher enterprise services revenue carries higher COGS with it. So the mix inside server and tools might not be as strong as you would like from a revenue point of view, but that is just a natural consequence. In terms of decisions that we made, we have budgeted headcount and people hired to their budgeted levels. That is a good thing in the sense that we hired people that we want to hire and we were particularly successful. That is a reflection to a large extent of the economic environment and the fact that if anything at the moment, we are an even more attractive company than we have been to people. That hits us from an expense point of view, but I would describe it in one of the categories, it is a conscious decision to hire people. In terms of things that were outside our control, FX was a factor. FX has been our friend throughout the year in terms of driving more revenue upside than more expense, net net it has been a positive, because we have more revenue outside the U.S. than we do expenses. In the fourth quarter, it was an unusual quarter in that we hired a lot of people outside the U.S. and the mix of expenses was such that the FX impact was higher on OpEx than it was on revenue. If you look across the year, that is not the case but in the quarter, it was.
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