Analyst Conference Summary

Microsoft
MSFT

conference date: April 24, 2008 @ 2:30 PM Pacific Time
for quarter ending: March 31, 2008 (Q3 fiscal 2008)

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Forward-looking statements

Overview: Not a good quarter, as growth stalled and earnings sank due to the European fine.

Basic data:

Revenues were $14.45 billion, flat from $14.40 billion year-earlier.

Net income was $4.39 billion, down 11% from $4.93 billion year-earlier

EPS (earnings per share) were $0.47, down 8% from $0.51 year earlier.

Guidance:

Fiscal Q4, ending June 30th, revenues expected between $15.5 and $15.8 billion. Operating income $5.8 to $6.2 billion. EPS $0.45 to $0.48.

Full fiscal year ending June 30th, 2009 preliminary guidance: revenues $66.9 to $68 billion. EPS $2.13 to $2.19.

Conference Highlights:

Revenue growth was led by 68% y/y growth in Entertainment and Devices revenue, including Xbox 360. Also 18% y/y growth in Server and Tools segment.

Claims revenue and other numbers actually grew from year-earlier if you subtract out $1.7 billion of Q3 fiscal 2007 revenue from the Technology Guarantee and Pre Shipment deferals resulting from the earlier introduction of Vista. Claims normalized y/y EPS growth was 27%.

GAAP numbers include a charge of $1.42 billion, or $0.15 per share, for the European Commission fine. There was an Income taxe benefit of $0.15 per share for the resolution of a tax audit.

Operating expenses were $10.05 billion. Operating income was $4.41 billion. Income tax provision $0.42 billion.

8 to 10% y/y growth in PC market.

$11.5 billion contracted-not-built balance. Total bookings grew 14% y/y.

Client segment $4 billion revenue, down 24%, or up just 2% adjusted for tech guarantee. 76% of mix was premium.

Server and Tools segment had $3.3 billion revenue, up 18% y/y.

Online Services segment $843 million revenue, up 43%, advertising grew 39%, both partly due to acquisitions.

Business division revenues were $4.7 billion, down 2% y/y, affected by tech guarantee.

Entertainment and Devices segment was $1.6 billion up 68%. In lead over PS3.

9 to 11% PC hardware global growth (y/y) expected for Q4. 11% to 13% for full year.

Tax rate expected to decline in fiscal 2009 due to shift of revenue to lower rate jurisdictions.

Yahoo: Microsoft can do its online advertising strategy alone if necessary. Given our offer premium, we expected a speedy agreement, but Yahoo has delayed. Microsoft is not in favor of raising its offer.

Q&A:

Macroeconomic impact? We are diverse and global. Could be impacted if a downturn gets worse than it is. 2/3rds of our business is outside U.S., and a weak dollar helps us.

Robust 2009 guidance? Does included expected online growth. 20 to 25% of expense growth will be to drive online division. Yahoo would be an overlay.

Currency impact in quarter? Around a 3% impact for both revenue and expenses.

Piracy? We did good in fiscal Q1 and Q2, not so good in Q3. We still believe we can drive unit growth about 1% faster than market growth as we reduce piracy. It is lumpy from quarter to quarter; needs to be looked at on a long term basis.

PC demand? Started fical year believing 9 to 11%, and Q3 was 8 to 10%. Ending year at 11 to 13% despite macroeconomic backdrop. Q4 expects 9 to 11% (over prior year) We are seeing nothing unusual so far this quarter.

Vista v. XP? No Vista issues in Q3. We are happy to sell a unit of XP instead of a unit of Vista.

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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. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2008 William P. Meyers