News

Microsoft's Revenues Flat in 3Q 2008 Report

Microsoft had flat revenue results as reflected in its third-quarter 2008 report.

• By Kurt Mackie
• April 24, 2008

However, it all depends on how you calculate the numbers, and Chris Liddell, Microsoft's senior vice president and chief financial officer, described the third-quarter results a little differently, factoring in a "tech guarantee" offer associated with upgrades from Windows XP and Microsoft Office 2003.

"The third-quarter results demonstrate the benefits of our diversified business model," Liddell said in an earnings call today. "Our broad span across geographies, product categories and customer statements is a tremendous asset in any environment, and produced third-quarter results of 14 percent revenue growth, normalized for the tech guarantee, and 27 percent earnings per share [growth], adjusted for the tech guarantee, legal charges and tax benefits -- beating our earnings per share guidance by two to four cents."

One hit to Microsoft's revenues was the payment in this quarter of a $1.42 billion penalty to the European Commission for anticompetitive behavior. The European regulatory body had accused Microsoft of offering unreasonable terms to competitors when it came to licensing Windows server protocol technology.

Diversification in a Bad Market
Liddell repeatedly noted Microsoft's diversified investments. He said that about two thirds of Microsoft's business is now located outside the United States. This diversification will help Microsoft as a company in an uncertain U.S. IT technology market, which Liddell acknowledged.

"On the more macro level, there has been some uncertainty regarding the strength of the IT spending environment," he said. "Our progress has remained robust in the face of that uncertainty. While clearly no business can be viewed from the impact of an economic slowdown, we remain confident in the diversified business model and the investment approach we've taken in recent years."

Liddell was optimistic about Microsoft's earnings prospects for the remainder of the year.

"We are now expecting earnings per share growth of 33 to 35 percent this year, normalized for legal challenges and tax benefits, which is an outstanding achievement in the current economic environment."

Emerging markets will make up for an anticipated slowdown in mature markets, according to Colleen Healy, Microsoft's general manager of investor relations.

"We estimate PC unit growth rates moderated from our January expectations by a couple of points in mature markets, partially offset by an extra planned strength in emerging markets, resulting in an estimate of approximately eight to 10 percent for the entire PC market during the quarter," she said.

However, Microsoft continues to be dogged by the use of pirated or unlicensed software in some of those emerging markets.

"We believe there was an increase in shipments of unlicensed PCs, particularly in Asia," Healy said.

High Points
Some high points for the third quarter included the Microsoft SharePoint product, in which revenue was up "over 35 percent," Healy said. She added that revenue from Microsoft's unified communications products was "up over 20 percent" and Dynamics customer billing revenue was "up 13 percent."

Microsoft saw high revenue growth in its entertainment product line, which grew to "68 percent to $1.6 billion, over $300 million over our high-end guidance driven by the sale of 1.3 million Xbox 360 consoles," Healy said.

Liddell anticipated further growth in the PC hardware market overall, led by emerging markets.

"In the fourth quarter, we expect PC hardware unit growth of nine to 11 percent. Growth will continue to be driven by the strength in emerging markets, while we are tempering our forecast for growth rates in mature markets."

The Yahoo Question
Of course, the question on everyone's mind was the effect of Microsoft's proposed acquisition of Yahoo, which was not projected into Microsoft's third-quarter results. Liddell simply emphasized Microsoft's online search strategy, regardless of the outcome of Microsoft's unsolicited bid for the company.

"With or without a Yahoo combination, Microsoft is focused on the online advertising market, which is expected to double by 2010 to $80 billion," Liddell said. "While Yahoo would accelerate our efforts, we have existing strategies that are already bent on three key problems: drive innovation in search, increase daily leads to advertisers and publishers through innovation and scale, and grow user engagement across our MSN and Windows Live properties."

Liddell stressed that speed was of the essence in consummating the deal with Yahoo and that Microsoft's offer at the end of January (originally valued at $44.6 billion based on stock and cash) was "extremely generous." He warned that Microsoft intends to maintain discipline and wouldn't offer more to Yahoo.

"The strongest argument that I've heard that we should increase our bid, simply because we can afford to, is not one that I favor," Liddell said. He rejected Yahoo's contention that Microsoft's bid undervalues the company.

"We've yet to see tangible evidence that our bid substantially undervalues the company. In fact, we see the opposite. Yahoo continues to lose search share and profitability continues to decline year on year."

Liddell wound up his description of the proposed Yahoo acquisition with a warning shot.

"Unless we make progress with Yahoo towards an agreement by this weekend, we will consider our alternatives," he said. "We will provide updates as appropriate next week. These alternatives include talking to Yahoo shareholders or to withdraw our proposal and focus on other opportunities, both organic and inorganic."

This Saturday (April 26) is the deadline for Yahoo to deal with Microsoft, according to a letter sent to Yahoo's board of directors by Microsoft's CEO Steve Ballmer. Ballmer threatened "the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! Board" if an agreement wasn't reached by that date.

Microsoft third quarter 2008 report and Webcast are currently accessible at the company's investor relations Web page.