Microsoft's Coming Revenue Trade-Off - InformationWeek

InformationWeek is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them.Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.


Microsoft's Coming Revenue Trade-Off

The company appears to be gearing up to sacrifice some earnings growth to reinvest in other projects, according to analysts at this week's briefing with Microsoft executives, who talked about financial guidance over the next few quarters.

Microsoft sales and earnings projections for the next few quarters signal that the company is willing to sacrifice profit for long term growth.

For fiscal 2007, starting July 1, 2006, the company expects revenue in the range of $49.5 billion to $50.5 billion; operating income between $18.7 billion and $19.3 billion and diluted earnings per share somewhere between $1.36 and $1.41.

Those numbers puzzled analysts. The consensus had been for earnings of $1.53 per share on revenue of $49.5 billion, and they wanted to know where that money was going.

On Thursday evening's third-quarter earnings call, Microsoft CFO Chris Liddell summarized those expectations and sparked questions.

"The revenues looks good…but your expenses are more than $2.4 billion more than I estimated....There's something really big here. It sounds like you're building a Google or a Yahoo and Ray Ozzie has said this is really expensive. It looks like you're ramping up your online business and the decision is to take the benefits of next year's product cycle to gear up for a battle in the online market," said Rick Sherlund, partner with Goldman Sachs as he tried to suss out specifics.

Ozzie is the Microsoft CTO charged with building the company's nascent software-as-a-service effort.

Liddell said there was no smoking gun. "In terms of the $2.4 billion, I wouldn't come up with that number. I'd characterize this as a broad-based approach across multiple fronts. I don't think there's any Trojan horse we haven't talked about …. We are not building into our guidance things we're not talking about."

In her follow-up query, UBS Warburg analyst Heather Bellini said it appeared that over the next few years Microsoft would see accelerated revenue from launches but was willing to sacrifice earnings growth to reinvest in other projects.

Liddell would not comment beyond next year's guidance but "clearly from our point of view, we've made a strategic decision relative to next year where we're willing to make that trade off to get ahead and also in the third and fourth quarters as well. I don't want to extrapolate to '08 or '09."

This news worried Wall Street. In a research note published after the call, Sherlund wrote that the company's spending outlook "is quite surprising."

Management disclosed "plans to accelerate spending by roughly $2 billion more than expected in fiscal (June) 2007. This effectively takes the wind out of the sails of investor sentiment at a time when investors were beginning to warm up to prospects for accelerating earnings momentum...from Vista and Office 2007 product launches in January," Sherlund wrote.

In other tidbits from the call, Microsoft expects revenue for its upcoming fourth quarter to fall in the $11.5 billion to $11.7 billion range, representing 13 percent to 15 percent growth over the year-ago period.

Liddell said the company expected client revenue growth in the 7 percent to 8 percent range, and raised guidance on the already robust server and tools unit, which he now expects to hit 17 percent to 18 percent growth.

For the third quarter that ended March 31, that group saw 16 percent growth, with SQL Server 2005 a standout, logging 30 percent growth in sales over last year.

The Information Worker unit, including the Office franchise, is expected to grow in the 5 percent to 6 percent range for the fourth quarter, and Microsoft Business Solutions expects business to grow 11 percent to 13 percent for the quarter ending June 30.

For the full fiscal year, the company expects revenue to be between $44 billion and $44.2 billion, representing year over year growth of 11 percent, Liddell told press and analysts on Thursday's earnings call.

In highlights for the recently-closed third quarter, Liddell said the closely watched Microsoft Business Solutions unit posted earnings of $216 million, up 21 percent from $179 million for the year-ago period. Liddell cited 28 percent growh in license revenue, especially in ERP.

MBS reported a profit last quarter, slightly ahead of schedule.

Liddell also said several times that sales of multiyear licenses were up. The company saw "strong renewals on Enterprise Agreements and both Select and Open annuity deals for the quarter were very strong relative to non-annuity deals," he said.

Increasing uptake on these multi-year subscriptions has been a top priority for Microsoft, which viewed bought-but-undeployed licenses as a time-bomb as it prepared its Vista and Office 2007 launches.

The company acknowledged last month that both the new Vista Windows client and Office would not be generally available--outside EAs--until early 2007.

For the third quarter overall, the company posted a net profit of $2.98 billion, or 29 cents per share, compared to $2.56 billion, or 23 cents per diluted share, a year earlier. Revenue rose 13 percent to $10.9 billion.

Excluding legal charges, Microsoft earned 32 cents a share. Analysts, on average, had forecast net earnings per share of 33 cents per share on revenue of $11.04 billion, according to Reuters Estimates.

Analysts expect PC demand to soften in the coming quarters ahead of the upgrades.

Additional reporting from Reuters was used in this story.

This story was updated Friday with details from Goldman Sachs' research note.

We welcome your comments on this topic on our social media channels, or [contact us directly] with questions about the site.
Comment  | 
Print  | 
More Insights
The State of Cloud Computing - Fall 2020
The State of Cloud Computing - Fall 2020
Download this report to compare how cloud usage and spending patterns have changed in 2020, and how respondents think they'll evolve over the next two years.
InformationWeek Is Getting an Upgrade!

Find out more about our plans to improve the look, functionality, and performance of the InformationWeek site in the coming months.

11 Things IT Professionals Wish They Knew Earlier in Their Careers
Lisa Morgan, Freelance Writer,  4/6/2021
Time to Shift Your Job Search Out of Neutral
Jessica Davis, Senior Editor, Enterprise Apps,  3/31/2021
Does Identity Hinder Hybrid-Cloud and Multi-Cloud Adoption?
Joao-Pierre S. Ruth, Senior Writer,  4/1/2021
Register for InformationWeek Newsletters
Current Issue
Successful Strategies for Digital Transformation
Download this report to learn about the latest technologies and best practices or ensuring a successful transition from outdated business transformation tactics.
White Papers
Twitter Feed
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.
Sponsored Video
Flash Poll