Vista, Office '07 drive up Microsoft's Q3 revenues 27 April, 2007 By Patricia Pickett

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The Redmond, Wash. software giant reported revenue of $14.4 billion for the quarter ended March 31, driving record profits with operating income of $6.59 billion and net income of $4.93 billion. Diluted earnings per share for the quarter grew 72 per cent to $0.50, and included $0.02 in tax benefits and $0.01 in legal charges.

"I'm extremely pleased with the company's financial performance during the quarter, as revenue, operating income and earnings per share exceeded our expectations and each grew with strong, double-digit growth," said Chris Liddell, Microsoft's chief financial officer, during a Web cast. "Our results were primarily driven by strength in our core products." Four of Microsoft's five businesses experienced double-digit growth and the vendor saw "broad strength across all customer segments and channels," Liddell added.

The above numbers reflected a previous deferral of $1.67 billion of revenue and operating income, $1.14 billion of net income and $0.12 of diluted earnings per share, primarily related to the technology guarantee programs for Windows Vista and the 2007 Microsoft Office release. Excluding those deferrals would bring revenue growth down to 17 per cent, which Liddell maintained was still "extremely good."

Client revenue came in at $5.3 billion, an increase of 67 per cent year-over-year, "driven by growth in all channels due to launch of Vista," said Colleen Healy, Microsoft's general manager of investor relations. The increase includes $1.2 billion deferred from the technology guarantee programs; excluding the deferral would show 30-per-cent growth. The increase in OEM license growth was 20 per cent, with an OEM premium mix of 71 per cent driven by sales of Vista Home Premium. Client, commercial and retail licensing grew 63 per cent, excluding the recognition of pre-launch revenue deferrals, driven by strong sales through the retail channel after the Vista launch, as well as a "very healthy commercial business," Healy added.

Server and tools revenue was up $2.7 billion, amounting to 15 per cent year over year growth. Double-digit growth in Windows Server, SQL Server, Visual Studio contributed to the increases.

Microsoft's online services business saw "continuing improvement" in the monetization of its advertising platform, resulting in advertising revenue growth of 23 per cent, partially offset by decline in access revenue, said Healy. Overall, revenue for the online services business increased 11 per cent to $6.2 million. Microsoft said its search revenue benefited from a higher number of search queries and increased revenue per search on both a year-on-year and sequential basis. The vendor said it is now monetizing more effectively in the U.S. on its own AdCenter platform than it did when using third-party Overture.

Microsoft sees the online services business as a long-term one and is happy with some aspects of it, while other parts could stand to improve, said Liddell. For example, the display and communications side are doing well, but "we aren't happy, clearly, with the market share we have" in search, he added.

The Microsoft Business Division grew to $4.8, experiencing 34 per cent growth, or 24 per cent after adjusting for the technology guarantee programs. Driving the growth were sales on both the consumer and business side of 2007 Office, and retail sales were better than expected after the January launch.

The vendor's Dynamics business also saw a 20 per cent increase in customer billing year-over-year across its ERP and CRM product lines.

A 21-per-cent decrease in revenues clouded the skies for Microsoft's entertainment and devices business. A result of lower Xbox 360 sales, the decrease was "consistent with guidance," noted Healy. Microsoft sold more than 500,000 Xbox 360 consoles during the quarter, "so we did see good inventory movement during course of quarter," Liddell added. On the bright side, software and accessory attach rates for Xbox reached record levels in the U.S. and the Xbox Live following passed the 6 million-member mark.

For the quarter ending June 30, 2007, Microsoft expects revenue in the range of $13.1 billion to $13.4 billion. Operating income is expected to be in the range of $5.0 billion to $5.2 billion, while diluted earnings per share are expected to be $0.37 to $0.39.

For the full fiscal year ending June 30, 2008, revenue is anticipated to fall in the range of $56.5 billion to $57.5 billion; operating income between $22 billion and $22.5 billion; and diluted earnings per share in the range of $1.68 to $1.72.