The numbers are out. Revenue is slightly ahead of expectations at $17.37 billion, but not spectacular.But earnings are $0.69 per share vs a $0.58 consensus. That’s a nice beat.
The stock is flat after hours — that follows a 15% rise in the last five weeks, so investors had already priced a pretty good quarter into the stock.
Windows revenue was the weakest spot — only 1%, even though PC sales grew 2% to 4% worldwide. Microsoft says that’s because growth is happening twice as fast in developing countries, where prices for Windows are cheaper and piracy is more rampant.
But Microsoft continues to crank selling business software to its largest and most important customers.
The Online business continues to be a money pit — losses outstripped revenues for the fiscal year — and Microsoft and Yahoo are both concerned about revenue per search on Bing. The companies are working together to solve the problem, but there’s something odd going on here. Why were their initial estimates so far off?
Here are the numbers versus estimates.
- Revenue: $17.37B vs $17.25 billion consensus. Up 8%.
- EPS: $0.69 vs $0.58 consensus — that’s a good beat. Up 35% from last year. One big reason for the gap between revenue growth and EPS growth is tax benefits — Microsoft is earning a greater percentage of revenue overseas where tax rates are lower. The company’s effective tax rate was around 19%. That benefit can’t keep going forever — eventually Microsoft will have to pick up revenue growth to keep showing 20%+ EPS growth.
- Net income: $5.87B, up 30%.
- Cash: $52.8B.
- Unearned revenue: $17.1B. That’s a lot higher than analysts expected, and shows how well Microsoft is doing selling long-term software licence agreements to big companies and government agencies. It’s not a sexy business, but it drives Microsoft’s growth.
- Windows: $4.74B revenue vs $4.88B estimate (division estimates are via via Brent Thill at UBS). That’s down 1% from last year. $2.94B operating profit.
- Business Division (mainly Office): $5.78B revenue (+7%) vs $5.82B estimate. $3.62B operating profit.
- Server & Tools (infrastructure software): $4.64B revenue (+12%) vs. $4.54 billion. $1.77B operating profit.$$
- Entertainment & Devices (mostly Xbox): $1.49B (+30%) — exactly as predicted. Only $32 million in operating profit, although that’s better than last year’s loss of $172 million in the quarter.
- Online: $662m (+17%) vs $635m predicted. Once again, this division’s LOSSES were bigger than its revenues — a whopping $728 million. Overall this group has lost $2.56 billion during the fiscal year, on revenues of $2.53 billion.
Here’s our coverage of the earnings call. Click here or refresh your browser for the latest.
5:30pm ET: We’re underway here. Bill Koefoed from investor relations is leading the call with CFO Peter Klein.
5:32: Klein is talking about corporate customers investing in business software. Overall multiyear licensing was especially strong — Q4 bookings were up 17%. Microsoft added both more “seats” (new users on licence agreements) and additional products per customer.
EPS growth of more than 20% two years in a row.
Windows 7 deployment 5x faster than Vista.
Search — Bing continues to gain market share. Deepened relationship with Facebook. “Partnered closely with Yahoo to uncover gaps and deficiencies.”
Xbox Live — 35 million members.
5:36: Skype — both consumer and business. No news today, though. (Not from the call: it’s still under regulatory review in Europe.)
5:37: Bill Koefoed is back. He’s going through all the details from the press release.
Unearned revenue balance $17.1 billion. Contracted-not-billed is $18.5 billion. (In other words — mutliyear licence agreements are driving Microsoft’s business.)
Consumer PC market up 2%. Revenue down 1% because growth is faster in developing countries where the price is lower.
5:40: Consumer sales of Office were down 7%, but one-time sales to businesses were up 20%. Launched a year ago — the Business Division’s revenue grew 16% over the year.
Lync, SharePoint, and Dynamics all growing over 10%.
Strong growth and share gains in Dynamics CRM — 300,000 new seats. Look out Salesforce.com.
No statistics about Office 365 — understandable because it just launched.
5:41: Server and Tools. (The quiet gem of Microsoft’s business for the last decade.) Windows Server and System centre (management) revenue keeps growing more than 10% per quarter, quarter after quarter.
Windows Azure (cloud computing platform) revenue growth accelerating, but still no numbers.
5:42: Bing. New features based on Facebook’s social graph. U.S. market share. But challenges with revenue per search, partnering with Yahoo to resolve these as quickly as possible.
Xbox: 1.7 million consoles during the quarter. Number-one console in the U.S. for the year. Combo of TV, entertainment, and Bing.
Mango is our “fall release” of Windows Phone. Signed Nokia alliance, launched on Verizon and Sprint. (But no sales numbers.)
5:45: Tax rate adjustments. 1. Reflect actual mix of foreign and US income. 2. Completed tax filing, resulting in adjustment. Effective rate only 19.2%, adjusting for one-time benefit due to IRS settlement last quarter.
Operating cash flow for the year $27 billion — up 12%.
Full year — returned $16.9B of cash (buybacks and dividend), up 10% year to year. Past five years, returned over 90B, reduced outstanding share count 17%.
5:47: CFO Peter Klein is back to talk about the coming fiscal year. We expect multiple hardware platforms, transition to cloud.
Windows: revenue to be impacted by market dynamics, emerging market growth faster than developed. Lower average selling prices, higher piracy rates. Business PC refresh cycle.
Nothing about Windows 8. That suggests it WON’T be an early release, but will come out near the end of calendar year 2012 at the earliest.
Business Division (Office and so on): transactional (one-time sales) revenue for the Business Division will lag overall PC growth because of faster growth in developing countries. But
Server & Tools: 37% of revenue comes from one-time sales, 50% from multiyear licenses, the rest from services. Will grow less than 10%.
Online: ad revenue roughly in line with overall ad market for quarter and fiscal year.
Entertainment & Devices: expect revenue up around 10% for quarter, 15% for year. Higher mix of hardware in this year’s Q1, because last year Halo Reach was launched.
Cost of goods sold: mix of revenue across hardware, software, online services, revenue services.
Expect operating expenses up 3% to 5%, $28.0 to $28.6B.
Unearned revenue at the end of FY’12, will be up about 10% from this year.
5:51: Q&A. 20% of Fortune 500 are exploring Office 365. When will that hit earnings?
1. Office 365 revenue. 2. Also shows up in multiyear licensing revenue.
Q: We’re not seeing very bullish expectations for Entertainment & Devices. What are you expecting around Nokia relationship next year and share gains with Mango?
Klein: Biggest driver for E&D is Xbox. (No comments on mobile.)
Q: How much money are you making from mobile (mainly Android) patents? And where would those show up?
Klein: Protecting intellectual property, industry-wide licensing program for Android, “which infringes some of our patents.” We don’t model that.
Wow, they’re really dodging the questions about mobile.
Q: Unearned revenue was well ahead of consensus, biggest growth since FY’06. What happened? Why so good?
Klein: Companies come out of economic downturn, adding lots of new technology. Making a long-term commitment to our product set.
A lot of revenue in new businesses like Lync. Taking share in ERP and CRM (Dynamics). Server & Tools has scaled across the board — big biz versions of Windows Server and SQL Server.
Q: Any change in what you’re seeing in enterprise demand US versus Europe?
Klein: Great demand in both places.
Q: You said that 25% of enterprise desktops committed to Windows 7. Are those mostly small and mid size businesses, and does “committed” mean already contracted?
A: On enterprise side, companies like JP Morgan looking at Windows 7. When we say “committed” means sales rep or partner has plans in place looking at rollout schedule. Engaged in testing.
Q. Unearned — is most of that enterprise?
A. Yep. Multiyear licensing agreements.
Q. What’s going on with revenue per search and Yahoo? How close are you to solving the problem?
A. We’ll have this turned around by end of this calendar year. Both sides signed up for that plan.
Q. What percentage of expense in Online is ongoing costs, and what percentage is transition costs related to Yahoo.
A. Mostly ongoing costs. High fixed cost business, as we grow revenue per search, that’s a highly leveraged growth. Laser-focused on growing revenue per search.
Q. What about repatriating cash?
A. Broader issue of income tax policy, we’ll leave to the experts. Repatriation, not big issue one way or the other for operations or strategy.
Q. Xbox Live — what’s the growth plan there?
A. Subscriptions first, once they get in more and more transactions.
Q. Office 365 has multiple bundles at multiple price points. Which are most popular?
A. Too early to tell. But pricing provides right set of choices to every segment, every customer.
That’s a wrap.