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conference date: October 26, 2006
for quarter ending: September 30, 2006 (1st quarter 2007)
Overview: Results at top end of expectations, but down sequentially.
Basic data:
Revenues of $10.81 billion, down 6% sequentially but up 11% from September 2005 quarter.
Operating income was $4.47, above guidance, but up only modestly year-over-year.
Net income was $3.48 billion, up 23% sequentially and 11% from year-earlier, resulting in EPS of 35 cents, up 20.6% from year-earlier. Guidance was .30 to .32.
Total cash and short-term investments ended at $31.8 million.
Guidance:
December quarter revenues of $11.8 to 12.4 billion. That excludes the $1.5 billion to be held over until March quarter. EPS of .22 to .24, reflecting deferral of .11 to following quarter (see below).
For fiscal year ending June 30, 2007, revenues expected at $50.0 to $50.9 billion, EPS at $1.43 to $1.46.
Assuming no major macroeconomic changes.
Server market to grow 10 to 12% for year. PC growth healthy but moderating in Q2 2007.
Client 9-10% full year growth. Server & Tools 15-16% for year and 14-15% for second quarter. Expect online services & search to grow slightly in Q2 and better for full year. Business revenue Q2 down 8-9% but up 8-9% for year. Entertainment 33-46% 2007 and 50-75% for Q2. Many of these show a Q2 revenue impact from Vista preshipments and technology guarantee.
Conference Highlights:
Server and Tools revenues up 17% over prior year. SQL Server revenue up 30%. Entertainment and Devices up 70%.
Making good progress towards release of Vista and Office 2007, and Zoon.
Averaging 1 acquisition per month. Virtualization of servers a priority.
Finished $30 billion prior stock buy back plan and started on new plan.
2007 will see double-digit revenue growth. First half of fiscal 2007 will be impacted by Xbox 360 sales. 2nd half EPS will grow faster than revenue. EPS to grow 13% to 15%.
PC market grew 8-10% in quarter driven by good back-to-school sales. Consumer PC growth outpaced business growth. Asia and Latin America had double-digit growth; single-digit growth elsewhere. Small and medium business channel was particularly strong. Enterprise renewal rate was in historic range.
Client revenue grew 4%. OEM up 4%. Emerging market growth stronger. Windows Media Center edition was over 50% in OEM channel.
5% advertising growth, but decline of 4% overall due to 30% decline in access revenue. Display revenue growth compensated for search decline. New Internet services released. 4% growth in business revenue (Office, Exchange Server), good before new product launches next year. 19% growth in Dynamics segment. Mobile devices up over 40%.
Cost of revenues grew 35% due mainly to XBox. Resulting gross margins down 3%. Operating expenses increased 14%. Aggressive R&D investment.
Repurchased $4.8 billion of company stock. 10 billion shares outstanding.
Cost of goods sold as % of revenues will increase 8-9% in Q2 due to Xbox sales.
Full year 2007 tax rate of 31%.
Many risks and opportunities still exist, including execution risks and customer acceptance.
Q&A:
Premium products for Vista? 52 to 54% for full year.
Client compared to PC units? Will lag first half of year, be faster 2nd half of year.
Xbox margin improvements? Both from better costs per console and increased software revenue.
Operating expense reduction is mainly a Q1 to Q2 shift.
Online services (appearing to go sideways, why confident)? Revenue per search is going up. Display ad numbers are "reasonable as well."
Dynamics software? Change partly in fiscal 2007, mainly in fiscal 2008. Purely an accounting change. Changed marketing of licensing.
EPS guidance v. buy-backs? Lower tender offer, lower tax rate, offset by continued buy-backs and higher operating income. So stable prediction for full fiscal 2007.
Average Sales Price for Vista? Market will determine premium mix, they did make some assumptions for 2007 guidance, but don't want to give them.
Price inflation in acquisitions? Some inflation in that space, but looking for ROI and only buying what creates economic value.
Longhorn server cycle? On track for second half of 2007.
Virtualization impact on server software sales? Thinks is good for customers, Microsoft pricing is competitive, have good products.
Cash flow expectations? Will follow traditional patterns, including inventory build for Xbox.
SQL Server results? Across the board strength. Larger enterprises have adopted for critical applications while continuing to do well in mid-sized space.
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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.
Copyright 2006 William P. Meyers