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Microsoft Pri0

Welcome to Microsoft Pri0: That's Microspeak for top priority, and that's the news and observations you'll find here from Seattle Times technology reporter Matt Day.

July 22, 2011 at 7:28 AM

Businesses investing in IT drove Microsoft earnings past expectations

This story ran in the print edition of The Seattle Times on July 22, 2011. -Sharon Pian Chan

The past year for Microsoft was a year of big business.

Throughout fiscal 2011, Microsoft took in $4.8 billion more than the previous year, selling products that make the corporate world hum — Office and server software.

The growth in business software helped the company shoulder a downturn in consumer sales of PCs and Windows, as tablets from Microsoft competitors Apple and Google took off.

It also showed that, despite a slow economic recovery, businesses are investing in technology.

Microsoft’s financial report Thursday for its fourth quarter and fiscal year, which ended June 30, exceeded Wall Street’s expectations.

“It was a very solid quarter,” said Yun Kim, analyst at Gleacher & Co. in New York. “It was obviously driven by the enterprise side of the business, which is 75 percent-plus of their business.” The enterprise side refers to business customers.

Profit in the quarter increased 30 percent to $5.9 billion, compared with $4.5 billion in the same period a year ago. Earnings per share grew to 69 cents, compared with 51 cents a year ago.

Analysts had expected 58 cents a share and $4.9 billion in profit.

The profit was helped by tax savings that Wall Street had not expected. Without the savings, earnings per share would have been close to analysts’ predictions.

Sales grew 8 percent to $17.4 billion, compared with $16 billion a year ago. Analysts had forecast $17.2 billion.

For the fiscal year, profit grew 23 percent to $23.2 billion, compared with $18.8 billion in 2010. Earnings per share increased 28 percent to $2.69 vs. $2.10 a year ago. Analysts were expecting profit of $22.1 billion for the year and earnings of $2.59 a share.

Sales for the year reached $69.9 billion, up 12 percent from $62.5 billion a year ago. Analysts had forecast $69.7 billion.

Chief Financial Officer Peter Klein, in a conference call Thursday to discuss the report, called the results “solid.”

“We have good product momentum in the market and are excited by the opportunity to help our customers take advantage of the advancing trends in technology,” he said.

Analysts were particularly excited by the number of contracts Microsoft signed with business customers. The company said it has $17.1 billion in sales built in to signed contracts that Microsoft will collect in the future, known as “unearned revenue.”

“Those numbers were, in fact, incredible,” said Sid Parakh, analyst at McAdams Wright Ragen in Seattle. “Customers are pretty much buying into the road map” for Microsoft products.

Over the course of the fiscal year, Microsoft grew its stash of cash and short-term investments to $52.8 billion, compared with $36.8 billion last year.

Here is how each business division performed for the quarter and the year:

Windows division (Windows, Windows Live, Internet Explorer): Sales declined in both the quarter and the year, tracking a similar decline in the PC market.

Quarterly sales were $4.7 billion, a 1 percent drop from a year ago. While businesses increased purchases of Windows by 8 percent in the quarter, consumer sales dropped 2 percent. Microsoft has sold 400 million copies of Windows 7.

Operating profit in the quarter fell 4 percent to $2.9 billion.

Fiscal year sales fell 2 percent to $19 billion, while operating profit fell 6 percent to $12.3 billion. When asked how tablets from rivals are affecting Windows sales, Todd Setcavage, director of investor relations, said the company is not saying much.

Business division (Office, SharePoint, Dynamics, Lync): Office 2010 increased sales by 7 percent in the fourth quarter, but it was far less than the 21 percent sales growth in the third quarter. Sales of business software Dynamics grew 19 percent in the quarter.

Overall, sales reached $5.8 billion in the quarter, compared with $5.4 billion a year ago. Operating profit grew 12 percent to $3.6 billion.

For the year, sales grew 16 percent to $22.2 billion, while operating profit reached $14.1 billion, up 23 percent.

Server and tools (Windows Server, SQL Server, System Center): The server business has grown by leaps and bounds the past few years to $17.1 billion in sales in fiscal 2011, only $2 billion behind the Windows group. A year ago, the division saw $15.4 billion in sales. Six years ago, it was at $9.9 billion in annual sales.

Operating profit in fiscal 2011 increased 19 percent to $6.6 billion.

For the quarter, sales of server software rose 12 percent to $4.6 billion. Operating profit grew 14 percent to $1.8 billion.

Entertainment and Devices (Xbox, Kinect, Windows Phone): Sales, driven by Xbox, grew 30 percent to $1.5 billion. Microsoft shipped 1.7 million Xbox 360 video-game systems in the quarter.

The division went from a $172 million operating loss last year to a $32 million operating profit in the quarter.

For the year, sales increased 45 percent to $8.9 billion last year. At $1.3 billion, the division broke the $1 billion mark in annual operating profit, an increase of 114 percent.

Online services (Bing, MSN): The division continues its heavy losses. Bing has seen its search market share eke upward to 14 percent. Google has remained constant at 66 percent.

Sales in the quarter grew 17 percent to $662 million, while the operating loss widened to $728 million from $688 million.

For the year, sales grew 15 percent to $2.5 billion. The operating loss widened 9 percent to $2.6 billion.

Microsoft stock closed Thursday at $27.09, and slipped a half percent in after-hours trading to $26.95 per share.

Despite the company’s growth in sales and profit, Gleacher analyst Kim does not expect the stock price to rise much in the short term.

“This is completely a sentiment-driven stock,” he said. “They just have to show they can beat the overhang the investors have put on them — that this is a post-PC [era], and they don’t have a product for some of these emerging form factors that are eating away at its monopoly in PCs.”



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