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conference date: July 20, 2006
for quarter ending: June 30, 2006 (4th quarter)
Overview: Record revenues, poor earnings due to strong XBox sales. Share buy-back tender offer designed to give some immediate lift to the stock price.
Basic data:
Revenues of $11.80 billion were up 8% sequentially and up 16% over the prior-year. Net income was $2.83 billion or 28 cents per share, down 5% sequentially and down 24% from year-earlier. Included was a legal charge for $351 million.
Cash ended at $34.1 billion.
Guidance:
September quarter revenues expected between $10.6 and $10.8 billion. Earnings between 30 and 32 cents per share (assumes tender offer completed). PC growth rates to slow somewhat. XBox growth to slow just for quarter.
Growth will improve significantly after Vista launch. Server and Tool and SQL Server will continue to show double digit growth throughout the year.
Entertainment & devices expect over 50% growth.
For year ending June 2007 revenues of $49.7 to 50.7 billion. Earnings of $1.43 to $1.47 per share. Office 2007 & Windows Vista will drive exceptional growth in 2nd half of the year. Earnings growth will lag revenue growth in first half of year, but be reversed in 2nd half.
Increasing operating expenses for strategic nature of investments: XBox; launch costs ($450 million increase in 2007 over 2006) and marketing increases of another $450 million; quickening pace of development in high growth areas ($1 billion across of all business groups); investment in online services business ($500 million growth in 2007), including CRM Live and Office Live products.
Conference Highlights:
Revenue growth of 16% over prior year.
5 of 7 business groups had double digit growth rates.
SQL Server revenue grew 35% (year to year). Server and Tool revenue overall grew 18% (year to year). CRM product sales growing, as are mobile phone software sales (90% annual growth).
Healthy broad based demand across all segments and geographic regions. Only North America and Japan did not have double-digit growth.
Mix moving from license-only to multi-year agreements. Bookings very strong.
Information worker - Office products - 6% growth.
MSN revenues shrank 3%. 94% growth in home and entertainment segment. XBox very strong.
Cost of revenue grew primarilly due to XBox sales volume (they lose money on each XBox sold, hoping to make up the difference later on game sales).
34% effective tax rate for the quarter, higher than usual because of non-deductible legal charges.
Expects 8-10 percent PC growth for the 2007 year.
Execution risks are significant in the coming year, due to large number of new products.
Q&A:
Vista release timing assumption? November to businesses, January for consumers. A quarter's slip would have an impact of $200 to $400 million.
Windows Live won't be a big source of revenue in fiscal 2007. Ad Center is helping on search and ad revenue and costs.
Bookings and renewals? Combined strong renewals and good new customers.
Capital Expenditure: $600 to $700 million year-over-year. $200 to $300 million for MSN, mostly for infrastructure for growth.
Windows Server v. Linux: Happy with trends in line with market. Can now compete in high-performance. Investing heavilly in this.
China? Good OEM unit growth, predicting trend to continue. Anti-piracy efforts adding 1 to 2%.
Return to profitability for MSN? Do not expect profitability in this fiscal year 2007.
SQL Server growth? 35% growth; going forward see very good growth.
CRM new users hosted v. licensed? 50,000 new customers includes both; can buy a license and have someone besides Microsoft host it for you.
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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. Before making or terminating an investment you should always verify any factual basis of your decision from multiple independent sources.
Copyright 2006 William P. Meyers