Billion Dollar Charge Masks Excellent Results at Microsoft

Microsoft's full year earnings release showed excellent growth and profit, but the good news was overshadowed by the $1 billion charge for Xbox problems, which the company is taking on. Revenue for the full year to 30 June 2007 (Microsoft's fiscal 2007) was $51.1 billion, an increase of 15 percent over the previous year. For the fourth quarter, revenue was $13.4 billion, an increase of 13 percent. Despite the $1 billion charge, operating income was up 12 percent at $18.5 billion and 3 percent for the quarter at $3.99 billion. Net profit was also up, increasing 12 percent at $14.1 billion for the year and 7 percent to $3.04 billion for the quarter.

David Bradshaw, principal analysts at Ovum, said: "Microsoft's engine is firing strongly on all three of the main cylinders—the client group, business division and server division. There was a misfire in one of the smaller cylinders (entertainment and devices) which led to an uncomfortable judder for the ship's passengers, but the acceleration of the Microsoft cruiser continued. Looking at the three main cylinders, servers and tools saw revenue rise by 16 percent in the year to $11.2 billion, while operating income rose to $3.04 billion. Considering that many of its products are due for new versions—and one of them (the new version of Windows Server) is well overdue, this is an extremely good performance.

Microsoft's business division saw its revenue rise 13 percent to $16.4 billion and operating income rise by 13 percent to $9.62 billion. Quarterly, the revenue growth was stronger, fueled by Office 2007 and associated products which account for 90 percent of the group revenue.

The hidden gem in this group is the Dynamics business which we hear is doing extremely well, and cannot be far off $1 billion in annualised revenue on its own account. Indeed, one could make a case for Dynamics now being the best candidate to be the fourth major cylinder for the company.

Finally we have the client business which for the year grew 14 percent to $15 billion in revenue, while operating income rose 13 percent to $11.6 billion. Obviously this has seen good growth because of Vista, and while there has been some growth in business use of Vista, the main contribution has been from consumers going out and buying new Vista-powered PCs and (increasingly) laptops.

One interesting number was the strong growth in the uptake of software assurance—there were no direct numbers for this, but renewal rates exceeded Microsoft expectations of over 75 percent. We believe that large numbers of businesses of all sizes will use software assurance to upgrade, but that they will do it in their own time over the next year or two. As a result, the impact on client revenue growth will be less than the consumer uptake, because it's just not an option for a business to buy the latest and greatest thing without a lot of careful testing and planning.

Overall, an impressively consistent good set of results. The challenge to Microsoft will come in maintaining this kind of performance as, via its software plus services initiative, it and its partners adopt software-as-a-service as a delivery model for an increasingly wide range of products and services. To echo one of Microsoft's own internal mantras, 'Change the world, or go home'. The world's largest software company has committed itself to the first, so we'd all better get ready."

Ovum