Stunning Vista drives 72pc EPS for Microsoft

27 Apr 2007

UPDATE: Microsoft last night reported record profits for its third quarter of US$4.9bn and an operating income of US$6.5bn, driven by demand for Vista and Office.

The company reported revenues of US$14.4bn and investors in the company were awarded with 72pc earnings per share.

Looking ahead to the next quarter Microsoft is predicting a reduced revenue in the region of US$13bn and an operating income of US$5bn. Earnings per share in the fourth quarter are predicted to be between 37 cents and 39 cents.

For the full fiscal year ended in June, Microsoft is predicting end of year sales of up to US$57.5bn and an operating income of up to US$22.5bn. Earnings per share could be between US$1.68 and US$1.72.

“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 in the third quarter was US$7.29bn and Microsoft returned US$7.72bn 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 to these products,” 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.”

However, in some quarters the Microsoft results are not quite the good news story they represent at first glance. David Bradshaw, principal analyst at Ovum, explained: “While there’s no denying that Microsoft has had an excellent quarter, it’s not quite as good as the headline numbers indicate.

“Revenue and operating profit were both boosted by US$1.67bn from deferred revenue, mainly related to Microsoft’s technology guarantee programme, whereby certain buyers of Windows XP and Office 2003 can upgrade to Vista and Office 2007 at no cost – the deferred revenue was recognised as soon as these products were available to consumers.

“Also revenue benefited from the fall in the dollar compared to the euro and the pound – our estimate is by around US$210m, which is in line with Microsoft’s figure of 2pc. Together these reduce growth to 15pc, and while this is still an excellent performance for such a large company, it isn’t quite the same as 30pc.”

Another factor to watch out for, said Bradshaw, is that Microsoft has increased the rate at which it recognises deferred revenue from Windows Vista compared to Windows XP.

“As we understand it, Microsoft puts aside some of the upfront revenue from Vista licences to pay for updates and service packs that it makes freely available to everyone over the lifetime of the products. The faster rate implies that Vista is less buggy than Windows XP, so Microsoft has to allow less for issuing updates. Let’s hope that Microsoft is right!

“The big story, though, is that the uptake of Windows Vista has been at least as good as Microsoft anticipated. The only definitive numbers that CFO Chris Liddell would give was that 85pc of the desktop OSs shipped in the quarter were Vista and only 15pc were Windows XP.

“The key missing piece of information is how well this compares to the launch of Windows XP. Liddell would only say that the current mix was ‘very healthy’ and that ‘faster adoption of Vista is likely to be the result’. It also emerged that in OEM shipments to consumers, 71pc of sales were of Windows Home Premium.

“All this was driven by healthy growth in PC shipments, which Microsoft said grew at between 10pc to 12pc in the quarter – is this ‘Sayonara, Baby’ to Apple’s ambitions of growing market share?” asked Bradshaw.

Bradshaw added that of the key questions not answered yet is the adoption of Vista in enterprise customers. “It appears that there has been no rush yet – if there had, we’re sure Microsoft would have said so. Another piece of evidence comes from comparatively high level of renewals on Microsoft’s Software Assurance programme, where clients get upgrades to Vista at no additional charge, suggesting that users are giving themselves a breathing space of up to three years.”

By John Kennedy