Microsoft reported another strong if unspectacular quarter, with revenue of $17.37 billion (ahead of expectations of $17.26 billion) and EPS exactly in line with targets at $0.68.It looks like Office 2010 was the standout performer once again, as it’s been for the last year or so.
On the earnings call, the company said that Office is pulling through other products, particularly Lync (the company’s corporate IM and messaging product), which was up 25% from last year. (Scroll down to see our notes from the call.)
Microsoft also said that business PC sales were pretty good, with revenue up 5%. Consumer sales were flat, but that’s mostly due to netbooks disappearing (or being eaten by the iPad). If you ignore netbooks, sales of “traditional” PCs were up about 14%.
Also, Microsoft has decided that Skype will be counted in the Entertainment & Devices segment, alongside Xbox and Windows Phone, suggesting that it’s going to be integrated into those products first.
And in a welcome reversal from recent quarters, the Online division (Bing and MSN) actually CUT its losses from last year, to only $494 million during the quarter (down from $558 million last year). At least it’s moving in the right direction now.
The stock is down about half a percentage point after hours — it looks like Wall Street had a pretty good idea of what was coming. There may be concern over operating expenses, which are expected to be between $28.6 billion and $29.2 billion for the current fiscal year. That’s a lot higher than the $27.2 billion in operating expenses in FY’11, and is mainly because of the cost of running Skype. (Those expense numbers don’t include cost of goods.)
Here’s how the business did against expectations:
- Revenue: $17.37B vs. $17.26B expected
- EPS: $0.68 vs. $0.68
- Windows: $4.87B revenue (+2% from last year) vs. $5.0B
- Business Division (mostly Office): $5.62B (+8% organic*) vs. $5.4B
- Server & Tools: $4.25B (+10%) vs $4.3B
- Entertainment & Devices (Xbox): $1.96B (+9%) vs. $1.9B
- Online (Bing & MSN): $625m (+19%) vs. $610m
- Unearned revenue: $15.67B vs. $15.7B. This is an important metric because it shows how well Microsoft is doing selling long-term contracts to big businesses.
*Microsoft moved the Forefront security products from Server & Tools to the Business Division, adding about $100 million in revenue. The 8% growth doesn’t count that revenue.
Here’s our coverage of the earnings call.
2:30 PT: Investor relations head Bill Koefoed is kicking the call off with the usual boilerplate.
CFO Peter Klein is going over the results. Business Division (Office) is the big winner again. “Office is the overwhelming choice” for businesses, “despite the best efforts of our competition.”
Office 365 is apparently doing great, but they’re not going to give any numbers. Hmm. At some point this will become a material part of Microsoft’s business, but not today. (It’s still way under $1 billion a year — it just launched this spring.)
“We are well positioned to become the third mobile ecosystem.” Nokia, Samsung, and Windows Phone 7.5 will help there. (Note: Nokia is expected to launch its first Windows Phones next week at a conference in London.)
Microsoft recently extended its revenue-sharing agreement with Yahoo.
Last week, closed Skype acquisition. 170 million people rely on it for voice and video calls. Integration is starting. “Across our portfolio of products and services, including Lync, Windows Live, Windows PHone, and the Xbox Platform.”
Now back to Bill Koefoed for results. You can check all the numbers here — we’ll focus on the stuff not contained in the press release and 10-Q.
Unearned revenue $15.7 billion.
Overall PC market grew 1 to 3%. Business PCs grew 5% to record of 35 million. Consumer PCs flat because of weakness in netbook sales.
OEM licenses up 4%, business licenses 6%. “Sales of Windows licenses on traditional PCs showed healthy growth of 14%.” In other words — tablets what? (The iPad is eating netbook sales, but not the traditional PC market….yet.)
2:40: Lync — the messaging and voice product for corporations — was up 25%. That’s fast growth, but from a small base.
Skype users are spending 125 minutes per month, on average.
85% of the time, businesses buying the bundle of Sharepoint, Lync, and Exchange. All the products are pulling each other through.
2:42. Enterprise services revenue up 17%. That’s way faster than the 10% growth for the whole Server & Tools business. Unusual because Microsoft isn’t really a services company like, say, IBM or Dell or HP.
Online services. Online ad revenue up 21%. Huzzah.
“Deepening Bing’s social integration with Facebook and Twitter.”
“We continue to face monetization challenges” with Yahoo deal. But it’s getting better.
2:44: Now to Entertainment & Devices. Gears of War 3 sold 3 million units in its first week. There will be over 70 Kinect titles available for the holiday.
More than 35 million Xbox Live customers will begin to see TV content from partners like Verizon and Comcast. (Although they’ll still need TV subscriptions…this isn’t about cord-cutting.)
2:46: CFO Klien is talking expectations now. He’s using very vague terms, though.
Windows: Probably will grow slower than slower than PC rate. Office transactional licensing growing slower than last year.
E&D: “Including Skpye,” expect growth to be in high teens for full FY.
COGS will be higher because of Skype and other reasons. Opex will be $28.6 to $29.2B for fiscal year. Capex $2.5B — about the same as before.
OK, into Q&A. That was a fast runthrough. Thanks guys! Questions are always the best part.
Q: Is 100% Skype revenue going to be in E&D? Looks like revenue and opex lower than we expected.
A: Integration costs, amortization of IP, consider all that.
Q: How will you monetise Skype? And what about ultrabooks — will those be interesting?
A: With Skype, the deal just closed. New revenue opportunities related to advertising and premium services — they were working on that before we bought them. Plus, all the integration we’ve talked about.
No real idea about ultrabooks.
Q: Windows attach rate was good this quarter — was that from stamping out piracy, or inventory build?
A: Both. Piracy help, inventory build ahead of holidays.
Q: You lost less money in Online than we thought. Will these lower losses be sustained? Also, didn’t flow through bottom line in the company overall.
A: Continue to grow share, grow revenue per search. High fixed-cost business. Managing expenses. But the biggest thing is getting RPS up. “That’s what we’re laser focused on, that’s what we have people working with Yahoo on every day.”
Q: Please talk about Skype more. What about expenses?
A: Not much more to say. Everything we know is included in our guidance.
Q: Business Division, we’ve seen you doing at or above PC sales rates. Where are we in the upgrade cycle. And what’s transactional revenue for S&T?
A: In Business Division, (1) traction from integration of SharePoint, Exchange, and Lync with Office 2010. Customers buy the whole enchilada. (2) Cloud. “Every time we go into talk to enterprises about productivity, they want to have a conversation about cloud services.” They don’t always deploy now, but want to know where we’re going. “Long-term phenomenon with a lot of room to go.”
Transactional revenue was single-digit growth, in line with server hardware market.
Q: Are business PCs still outpacing consumer PCs?
Q: What’s up with the enterprise services growth?
A: Customers want help in deploying the private cloud, same with things like Lync and Sharepoint, transitioning to Office 365. (Aside: the services business at Microsoft supports the software, not the other way around.)
Q: What did you see as the quarter progressed? Anything regarding deal sizes?
A: Everything was as expected. Unearned revenue came in at expectations.
Q: Bookings were flat or down this quarter. What’s up? Is this difficult macro? Hard comparisons?
A: It was a strong quarter last quarter that pulled some revenue forward. All our metrics were in line with what we expected. No macro slowdown. Q1 is our lowest selling quarter during the year seasonally.
This was all reflected in unearned guidance last quarter.
Q: How much cash is offshore?
A: About $51 billion is offshore. We have plenty of cash, it’s not an issue (keeping lights on and dividends paid).
Q: Regarding Samsung deal (for Android licensing), how much will you earn in royalties in mobile phones?
A: Not gonna say. Check our Entertainment & Devices guidance — it’s all in there.
Q: Windows 7 PC upgrade cycle — where are we?
A: About in the middle.
Q: Yahoo RPS challenge — how do you assure there won’t be disruptions with all the “market talk” about what’s happening with Yahoo. If it’s acquired or split up, could be really disruptive.
A: We’ve got a really good relationship with Yahoo. Long term alliance. Working really well together. No matter what, that’s the goal at hand.
That’s a wrap, ladies and gentlemen.
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