Microsoft's Earnings: Key Takeaways

For some reason this earnings season has been more time consuming than usual and, as a result, I've not had the chance to blog about the results with the detail I normally do. Tonight I wanted to play a little catch-up and hit on the salient points of some notable software earnings reports. First up: Microsoft...

Microsoft (MSFT)
Q4'06 Results (7/20)

• Revenues of $11.8 billion (16% YOY)
  • Client: $3.38B (12%)
  • Server & Tools: $3.18B  (18%)
  • Information Worker: $3.13B (6%)
  • Business Solutions: $280mm (16%)
  • MSN: $580mm (-3%)
  • Mobile/Embedded: $113mm (41%)
  • Home & Entertainment: $1.14B (94%)

• Operating income of $3.88 billion (30% YOY)
  • Client: $2.50B (15%)

  • Server & Tools: $1.24B  (53%)

  • Information Worker: $2.15B (7%)

  • Business Solutions: $38mm (n/a)

  • MSN: ($190)mm (-288%)

  • Mobile/Embedded: ($2)mm (n/a)

  • Home & Entertainment: ($414)mm (n/a)

Notes of interest:

• Guidance slightly raised for FY07...$49.7B-$50.7B, EPS of $1.43-$1.47
  • Client: 8%-10% growth
  • Server & Tools: 14%-15%
  • Online Services: 7%-11%
  • MS Business: 9%-10%
  • Entertainment/Devices: 31%-46%
• Windows Vista release date not explicitly discussed
• Further clarity on the increased $2.4B capex (which pounded the stock last Q)
  • $450mm incremental "launch" marketing costs for Vista, Office 2007 and XBox holiday spending
  • $450mm ongoing sales costs (adding reps and support infrastructure)
  • $1B on R&D for "new stuff"...which includes Zume, BI, mobility, unified comms, IPTV
  • $500mm to build out ad network and search engine optimization
• Dutch auction of $20B (880mm shares, tendered between $22.50 and $24.75)
• Another $20B share buyback authorized

Key Takeaways:

• The Dutch auction was surprising and certainly welcome. An important nuance of the buyback is that management doesn't intend to tender any shares; showing their continued support for the company and implicit belief that the stock is undervalued.
  • The increased FY07 EPS is a direct result of the expected accretion from the Dutch auction
• 5 million XBox 360s have been sold...but losses accelerated. Can Microsoft leverage the XBox uptake with profitable software sales in the coming years? What kind of tie ratio can we expect and, related to that, will Microsoft need to acquire more publishing in-house to maximize the leverage in the razor/razorblade model?
  • undefined shipments took four percentage points off gross margin year on year
• Bookings growth of 25% was surprisingly strong, customers appear to be embracing the multi-year ELAs
  • Deferred revenue growth of 19% ($10.9B) further illustrates this point

Related Posts:

• MSFT Earnings Call Transcript (Seeking Alpha)
• Tim Boyd's Analysis
• William Trent's Analysis