Microsoft posted its earnings for the last quarter of 2010 a few minutes before market close today — the early post was a mistake and Microsoft is reviewing its procedures to make sure it doesn’t happen again.Despite a strong quarter, the stock is hardly moving — Microsoft needed a blowout quarter to get investors excited again.
Like last quarter, the Business division did particularly well, with 24% revenue growth from last year. That’s credit to Office 2010, which is selling more than 50% faster than Office 2007, according to the company. Consumer sales were particularly strong.
Other highlights included Kinect and Xbox sales, which helped the Entertainment and Devices business beat $1 billion in annual operating profit for the first time ever — only two quarters into the fiscal year. Microsoft’s Xbox business racked up more than $7 billion in operating losses in the early years, but if it continues to crank at the current rate, the company might finally start earning back its investment in a few years.
The company gave little guidance for the rest of the year, but said it expects IT spending to remain strong, and Windows revenue to rise in line with PC sales. As far as the iPad goes, Microsoft acknowledged that it’s seeing a slowdown in netbook sales, and suspects that some of those sales are going to “tablets” on other (unnamed) platforms. But overall, growth in the Windows and PC business seem strong enough that Microsoft isn’t worrying about it yet.
Key stats: (Expectations from Brent Thill at UBS):
- Revenue: $19.95 billion vs. $19.14 billion consensus, $19.73 billion “high” estimate
- EPS: $0.77 vs. $0.68 consensus, $0.73 “high” estimate
- Net income: $6.63 billion vs $5.92 billion expected
- Windows & Windows Live revenue: $5.05 billion vs $4.92 billion expected
- Business (mostly Office) revenue: $6.03 billion vs. $5.32 billion expected
- Server & Tools revenue: $4.39 billion vs $4.13 billion expected
- Entertainment & Devices (Xbox, Kinect, phones) revenue: $3.70 billion vs $4.06 billion expected
LIVE BLOG: As usual, if it’s not in quotes, it’s not a direct quote. (Parenthetical expressions are our commentary.)
5:30ET: We’re waiting for the call to start. Microsoft has fixed the hold music since last quarter — instead of depressing guitar, it’s some funky New Age/electronic thing.
5:32: Bill Koefed of investor relations is kicking off the call with the usual warnings about copyright, forward-looking statements, and the like.
5:33: CFO Peter Klein is talking now. Microsoft delivered record EPS, and six consecutive quarters of margin expansion. Kinect is the fastest selling consumer electronics device in history. Office 2010 is the most successful consumer version Microsoft has ever shipped, and also performing well in the business segment.
5:34: Nearly 90% of Fortune 500 companies worldwide have started their Windows 7 deployments.
5:35: Windows Phone 7. 9 devices, 60 operators, more than 30 markets. 93% customer satisfaction. “While we are encouraged by the early progress, we realise we have a lot of work ahead of us.”
5:37: Koefoed is back. Bookings grew 21%, that’s more than 4 quarters of 10%+ bookings growth. Bookings include companies signing long-term licence agreements, where revenue doesn’t hit the top line right away, as well as “transactional” one-time purchases.
5:37: More Kinect — “mentioned by a number of publications as the most innovative product of 2010.”
5:38: Unearned revenue balance grew 7% from last year, but declined from last quarter (not including the one-time Windows deferral). That’s unusual, as Q2 is usually strong for long-term licence agreements, but Microsoft pointed to bookings growth as evidence of strength.
5:39: 90 million PCs were sold during the quarter — the most ever. Within consumer PCs, netbooks declined. (Left unsaid: at least some of those netbook sales are probably now iPad sales.)
5:40: Windows revenue grew in line with PC sales, just as expected. (Note that year-ago results are skewed by $1.71 billion in deferred revenue from last year’s Windows 7 upgrade guarantee program. These results ignore that one-time bump.)
5:40: PC innovation — slates, ultraportables. Intel’s Sandy Bridge substantially improves performance, graphics, and battery life. At CES, Microsoft announced that the next version of Windows will support system on a chip (SoC) architectures based on ARM and Intel.
5:42: Server and Tools up 11% from last year. Windows Server, SQL Server, premium priced products like the Datacenter editions — all the usual suspects.
5:43: Online revenue grew 19%, with online ad revenue up 23%. Includes Yahoo search revenue. (But boy is that an expensive deal.) Also mentioning the deal with Facebook, which will include Facebook friend and “like” information in Bing search results.
5:44. “Enthusiastic consumer response to Office 2010.” Transactional (one-time sales) revenue was up 40%, but long-term (multiyear licenses) up less than 10%. “We are seeing” customers switch from Salesforce.com to Microsoft’s CRM Online
5:46: Operating income for the year has now surpassed $1 billion — a major milestone. Kinect sold 8 million, the revamped Xbox sold a record more than 6.3 million during the quarter.
5:47: It’s official: More than 2 million Windows Phone 7 handsets have shipped to operators.
5:47: COGS increased 33% from last year — that’s mainly because of growth in the Xbox business, where hardware costs are high.
5:48: Now CFO Klein is back to discuss expectations. IT spending is expected to grow in 2011, and Windows 7 and Office 2010 are among IT managers’ top priorities. Expect business PC refresh cycle to continue.
Windows will grow in line with PC market, minus the revenues attributable to the Windows 7 launch spike, which was worth about $700 million during FY’10.
5:49: Server & Tools will track mostly with the hardware market.
5:50: Business Division: Consumer and non-annuity (one-time) purchases make up about 40% of this division’s total, and will grow faster than PC sales as customers buy Office 2010.
5:50: “We recognise there has been some marketplace disruption” with Bing-Yahoo deal. Expect ad revenue to outperform the overall online ad market in Q3 and for full FY.
5:51: E&D revenue will be up 50% in Q3 from the previous year, and 40% for the whole year. It’s all about Kinect and its halo effect on Xbox 360 sales.
5:52: Now it’s Q&A time. Business upgrade cycle? And what about Software Assurance attach. (Software Assurance is a guaranteed upgrade program that customers have to pay for ahead of time.)
Generic answer — they’re expecting strong IT spending and SA attach is fine.
5:54: Business Division growth — mostly transactional (one-time licenses) or annuity (long-term licenses)?
Both. But better than expected performance in small and mid-size businesses, who usually buy transactional licenses.
5:55: Office revenue way outstripped PC shipments. Will that continue?
Very pleased with customer response. Go back to outlook we gave.
5:56: Brent Thill from UBS asks what the typical term length is for multiyear agreements. Are they renewing above original contract value?
Typically 3 year contracts. In many cases, we are adding new products and services to multiyear agreements. Newer enterprise products like Lync, SQL Premium migration from Oracle.
5:58: Windows licence shipments were actually down 5% year over year. How much does this relate to launch of Intel chips like Oak Bridge and Sandy Bridge, and how that affects inventory among hardware makers?
With OEM licenses, note that there was a spike from the launch last year. But what we saw this quarter didn’t have anything to do with January. The Intel chips are a new opportunity, businesses can “improve their refresh outlook.”
5:59: Emerging markets are growing faster than developed markets, but how much faster?
What’s pricing like in emerging markets vs. developed?
Prices are about half in emerging markets. We haven’t seen price pressure or big fluctuations in emerging markets.
What about tablet cannibalization? (The billion-dollar question.)
Netbooks hit their peak a year ago. Some of those devices are being replaced by ultraportable and tablets, these are largely secondary devices, not primary devices. (In other words, when people buy a second computer, they’re not as likely to buy a Windows PC.)
6:03: Search is now a duopoly. Is now the time to increase outreach and marketing?
We’re laser-beam focused on growing search share and growing revenue per search. We’ll keep focusing on growing share, lot of the same things we’re doing now. Product enhancements — that’s the most important thing we can do, that’s what drives usage and share. On RPS side, Yahoo integration is key component of that. We’ll do “interesting marketing things,” but product enhancements and partnerships are the key.
6:04: Where’s Kinect supply and what might we see in Q3, and how about margins in that business?
(No real answer on Q3 shipments.) Long-term story, you sell hardware first, then attach software and services. As we build Kinect, whole new generation of games to sell into our install base. Those are all very positive long-term for margins in that business.
6:05: What’s penetration of Windows 7 like among mid-market to enterprises?
Can’t say exact. “Majority of people I talk to” are either in the middle of doing it or planning. Most are saying they want to go faster. It is early in terms of getting those migrations done.
6:06: Cloud momentum. Where’s that revenue going to be in 12 to 24 months for things like Office 365?
No specifics. Momentum, conversations. “It’s going to happen, the exact speed of the ramp is uncertain.”
6:07: What about Azure? What conversations are you having as customers decide whether to stay on premise or use a software-as-a-service model?
Two conversations. Economics and capabilities. Applications, like Office 365, the economics are very good for them once they migrate over. But it’s also a very easy way to deploy the latest versions of our software. That’s the biggest reason to deploy.
On Azure, conversation is about moving from thinking about infrastructure as a service to platform as a service. Management, security, developer ecosystem.
That’s a wrap, thanks for joining.
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