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For Microsoft, a quiet quarter isn't a bad thing. Especially when you consider that in recent months, the software maker caught analysts off-guard with unexpected expenses and on another occasion posted blowout results. The first quarter of fiscal 2007 was neither of those. "This was kind of a tame quarter," says Goldman Sachs (GS) analyst Rick Sherlund.
Microsoft (MSFT) beat expectations, but just barely. Earnings per share hit 35¢, up from 29¢ in the first quarter of fiscal 2006, when the company incurred a one-time legal tab of 2¢ a share. Analysts had expected about 31¢ a share. Quarterly revenue grew a solid 11%, to $10.8 billion, in line with estimates.
"A Very Good Start" For Microsoft, the real news is what's yet to come. The rest of the fiscal year brings the launch of new versions of two signature Microsoft products—Windows and Office—along with the introduction of Zune, Microsoft's long-awaited answer to Apple Computer's (AAPL) iPod music player (see BusinessWeek.com, 9/15/06, "Coming Zune: Microsoft's Music Player"). Microsoft Chief Financial Officer Chris Liddell called the results "a very good start to what I think will be an excellent year."
The company shed a little light on the accounting around the new products, telling Wall Street that it would defer $1.5 billion in revenue from the current quarter to the fiscal third quarter as it begins to issue upgrade coupons for Windows Vista and Office 2007.
Those coupons give consumers who want to buy current versions of the software the ability to upgrade when the new consumer versions debut early next year (see BusinessWeek.com, 3/21/06, "Microsoft's Receding Vista"). But because Microsoft will eventually pocket the money, analysts aren't phased by the deferral or its size. "It just goes from one pocket to another," Sherlund says.
Server Biz Growth Microsoft's results were largely buoyed by its server software business, the engine of its growth for the last few years. The server business grew 17%, to $2.5 billion. That was fueled by sales of the SQL Server database software, which jumped more than 30%.
What's more, the entertainment and devices division saw sales climb 70%, to $1 billion, another sign Microsoft is benefiting from the head start of the Xbox 360 over rival gaming consoles from Sony (SNE) and Nintendo. Microsoft has sold 6 million units of the game console, which will only begin to face competition from new units from Nintendo and Sony this holiday season (see BusinessWeek.com, 10/30/06, "Games: Console Wars"). Even so, Microsoft expects to sell another 4 million Xbox 360 consoles through the holiday season. And Xbox margins are rising as component costs drop.
Solid Enough The only real blemishes in the quarter came in the online services business. Ad revenue climbed a modest 5% as the company continued to switch its advertising services from a contracted business run by Overture to its new adCenter technology. Recent search engine data from Nielsen//NetRatings shows that Microsoft is losing share to Google (GOOG). But Liddell says that the company's revenue per search is close to the level it was when it contracted with Overture.
Microsoft expects fiscal second-quarter revenue to be unchanged or grow as much as 5%, accounting for the coupon deferrals. That will push operating income down 33%, to 39%. But for the fiscal year, Microsoft increased its revenue guidance by about $300 million, to $50 billion to $50.9 billion, and its operating earnings guidance by about $100 million, to $19.1 billion to $19.5 billion. In particular, the company believes PC unit sales will climb 8% to 10% over the year. Hardly barn-burning news. But certainly solid enough.