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conference date: January 25, 2007
for quarter ending: December 31, 2006 (2nd fiscal quarter 2007)
Overview: Record revenues at top end of guidance. Deferral of recognition of some revenues, operating income and net income due to Vista upgrade guarantee program. Improved guidance for 2007.
Basic data:
Revenues of $12.54 billion are up 6% over year-earlier quarter. An additional $1.64 billion was deferred for Vista and Office guarantees. If no deferrals annual growth would have been 20%.
Net Income was $2.63 billion. Another $1.13 billion was deferred.
Earnings per share were $0.26. Another $0.11 was deferred.
Cash and short term investments ended at $28.9 billion.
Guidance:
March 31, 2007 quarter: revenues of $13.7 to 14.0 billion. This includes $1.68 billion recognized from prior deferrals. Operating income of $6.1 to 6.3 billion, also including $1.68 billion recognized from deferrals. Earnings per share of $0.45 to $0.46 including $0.12 from deferrals.
PC growth rate to be 8% to 10%, with consumer stronger than business. Mix of premium products percentage will go up for full year.
Full fiscal 2007: $50.2 to $50.8 billion in revenues. $19.3 to $19.7 billion in operating income. $1.45 to $1.47 per share.
Conference Highlights:
"Exceeded our expectations across the board, with revenue growth at or above our high end guidance for all divisions."
Segment revenue (excludes deferrals):
Client $2.589 billion
Server and Tools $2.845 billion
Online Services $0.624 billion
Business $3.512 billion
Entertainment and devices $2.964 billion
On an operating level, entertainment and online segments lost money; client, server and tools, and business had positve operating income.
In December saw encouraging signs of demand for Microsoft Office 2007, Microsoft Server 2007, and Microsoft Vista. Retail demand was robust.
EPS was 2 to 4 cents above our October guidance due to lower marketing costs.
Continue to expect Fiscal 2007 to show full year double digit revenue growth and faster EPS growth.
Revenue growth for the quarter was driven by a 76% increase in Entertainment and Devices (year over year) driven by Xbox 360 sales. More than Wii and Playstation combined.
PC market grew at 8% to 10% in quarter, stronger than expected. Consumer growth outpaced business growth. Notebooks outpaced desktop. Emerging markets led growth.
Volume licensing growth was strong. Unearned revenue balance ended at $11.9 billion. Contracted not built balance grew to $9.5 billion. Bookings growth exceeded 20%. Foreign exchange impacted revenue growth rate positively 1 billion.
Media Center grew because of pricing guarantee attractiveness.
Server and Tools had 17% revenue growth; SQL Server was up over 30%.
Online Services Access revenue grew 5%, with ad revenue up 20%, but declining access revenue. Search revenue showed year-over-year growth.
Zoon launched (no figures given).
Gross margin down about 10 percentage point (year over year) due to strong Xbox 360 sales. Operating expenses grew $509 million or 10%, more than expected. $3.5 billion operating income. $333 million investment income and others.
31% tax rate.
205 million shares repurchased or $6 billions worth; $980 million dividends.
Display ad business is growing well.
Xbox business will now optimize for profitability so they can reach it in fiscal 2008.
Q&A:
Assumptions for higher priced mix in March quarter? Shipments up 9 to 11%. Commercial and retail impact because of Vista will drive better mix.
Service Pack 1 for Vista? Still getting feedback, no date set.
Online Services? Ad revenue grew 20% for quarter, but display side did much better than search, where they lost market share. Will continue to invest to improve. Will talk about specific metrics at February analyst meeting.
Xbox lowered guidance? Mainly profitability and some need to management of inventory.
Premium mix for Vista? Assuming no change for Vista from earlier forecast.
Q3 revenues for new products? Looking at previous introductions but assuming more gradual. Heartened by guarantees not hurting sales.
SQL Server growth? We were surprised on the upside too, partly due to a price increase during the quarter.
Office 2007 pricing mix? For balance of fiscal year not expecting much impact. Renewal rates were at top end of range in anticipation of new product.
Enterprise renewal activity? Really nice renewal rates. Uptick of customers adding Windows under their enterprise agreements.
Why can't pricing go up on Office 2007? At upper end has added more value, and pricing did go up 5%. Sku differentiation is what they are going for. Trying to add value at a given price point over time.
Q2 impact on future spending? Kept expense guidance number for year; does give some flexibility on quarter by quarter basis. May not really be a trend.
Any upside potential? Not on expenses, but could be some on revenue side. With a launch there could be some variability, but they have guided as best they can.
Longhorn? Still planning on end-of-year release.
New version of Xbox? No.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2007 William P. Meyers