Slowly But Surely

Vista & Office 2007 Drive Microsoft Profits
by: Jerry Liao

After Microsoft launched Vista and Office 2007, some analysts and critics were saying that the two products would not be as successful as the previous ones. It seems this time, they’re all wrong.

Microsoft Corp. announced revenue of $14.40 billion for the quarter ended March 31, 2007, a 32% increase over the same period of the prior year. This revenue drove 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% to $0.50, and included $0.02 in tax benefits and $0.01 in legal charges.

These results reflect $1.67 billion of revenue and operating income, $1.14 billion of net income and $0.12 of diluted earnings per share that were previously deferred primarily related to the technology guarantee programs for Windows Vista™ and the 2007 Microsoft Office release.

“I am extremely pleased that we delivered a quarter of strong double-digit growth for revenue, operating income and EPS,” said Chris Liddell, chief financial officer at Microsoft. “And I am looking forward to a very good finish to this fiscal year with strength continuing into fiscal 2008.”

Net cash flow from operations was .29 billion and Microsoft returned .72 billion in cash to shareholders through share buybacks and dividends this quarter.

“This quarter marked the consumer launches of Windows Vista and the 2007 Microsoft Office system, and we are delighted with the positive customer response these products have received,” said Kevin Turner, chief operating officer at Microsoft. “We continue to deliver on our compelling product cycle and build upon strong field sales and marketing execution in order to drive revenue and profit growth for the company.”

Colleen Healy, general manager of investor relations at Microsoft, said the revenue growth was driven in particular by a strong consumer response to Office 2007, yielding “better than expected” retail sales. She also said that Microsoft Dynamics, its mid-market ERP product, enjoyed a 20 percent climb in billing.

Microsoft said it had shipped 20 million Vista licenses. Because the sales are into the channel, it could be another quarter before the full impact of Vista’s release can be assessed.

Office 2007’s sales health is potentially better than Windows Vista’s, even with the operating system’s stronger sales and income. More than 40 percent of Office revenue comes from volume licensing sales to businesses; by contrast, about 80 percent of Windows revenue comes from sales to OEMs. Office is getting an early consumer retail sales boost and benefits from strong volume license renewals. Vista is more subject to the wiles of PC purchasing, and there remains the aforementioned uncertainty about how much unsold inventory could impact the operating system during the current quarter.

The company’s 2008 business year, which starts in July, will be the first full year of earnings to benefit from consumers buying new computers loaded with Vista and Office 2007, or companies upgrading computer systems. Microsoft expects the latest versions of its two flagship products to underpin profit growth over the next few years. Those two product lines alone account for more than half of Microsoft’s total revenue and a majority of its profits.

Microsoft management offers the following guidance for the quarter ending June 30, 2007:

• Revenue is expected to be in the range of .1 billion to .4 billion.
• Operating income is expected to be in the range of .0 billion to .2 billion.
• Diluted earnings per share are expected to be $0.37 to $0.39.

Management offers the following preliminary guidance for the full fiscal year ending June 30, 2008:

• Revenue is expected to be in the range of .5 billion to .5 billion.
• Operating income is expected to be in the range of .0 billion to .5 billion.
• Diluted earnings per share are expected to be in the range of .68 to .72.

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