Windows XP, Licensing 6.0 Lift Microsoft Into The Black

Microsoft

While the software giant took a significant hit on its investment portfolio--and another charge of 8 cents for class-action lawsuits--it performed modestly above its own expectations and those of Wall Street.

Microsoft on Thursday reported a profit of $1.53 billion, or 28 cents per share, up from $65 million, or 1 cent per share, from a year earlier when it took a charge on investment losses. For this quarter, Microsoft also took a charge for investment impairments of $806 million, or 15 cents per share, largely due to losses in the company's cable and telecommunications portfolio. Excluding those charges, the company would have posted a per-share profit of 43 cents, above Wall Street expectations of 42 cents per share, according to First Call.

For its 2002 fiscal year, which ended June 30, the software giant reported a $11.9 billion profit on $28.4 billion in revenue, a 12 percent increase in revenue from the prior year. Earnings per share for the fiscal year was $1.41, an increase from $1.32 earnings per share in fiscal year 2001.

Despite the slowdown in IT spending, sharper-than-expected decline in PC shipments and softening of financial markets, Microsoft's financial performance for the quarter and year was strong relative to other enterprise software companies, Microsoft executives said.

Strong OEM sales of Windows XP as well as Windows servers and other server applications and tools led business tools growth. Executives also attributed a good portion of this to wide acceptance of its new Licensing 6.0 volume licensing program, whose deadline is fast approaching on July 31. Unearned revenue for the quarter jumped to $7.7 billion, up about $2 billion from the $5.6 billion in the same quarter a year ago. Roughly $6 billion of unearned revenue--most of which is derived from volume licensing--will be realized during Microsoft's 2003 fiscal year. Volume licensing now represents about 20 percent of Microsoft's total revenue, Microsoft finance executives said.

"We were real pleased with annuity licenses, and we're seeing a much broader product lineup to sell from the server side and a much higher attach rate of server products in all forms of multiyear license agreements than we've seen historically," said John Connors, senior vice president and CFO, noting that Enterprise Agreements represent the largest portion of Microsoft's volume license deals. "As part of Licensing 6.0, we reduced the number of the desktops' minimum to 250 seats, so we expect to have continued success with renewals and conversions. Over the next few years, we will convert more Select and Open licenses to Enterprise Agreements in midsize companies."

"[Fiscal year 2002 was probably one of most challenging periods for our industry and for Microsoft, yet, despite industry turmoil and tough economic conditions, we executed remarkably well," said Scott Boggs, vice president and corporate controller. "We started the year with an expectation that PC sales would be soft %85 but no one imagined a decline of 4 percent for the year."

Nevertheless, Boggs noted that "strong uptake for annuity licensing programs" buffered the company's bottom line. "As anticipated, we saw many corporate customers take advantage of annuity agreements, as corporate licensing has, and continued to become, a significant [percentage of revenue," Boggs said. "The real strength is based on growth of unearned revenue, up 59 percent from last year."

Microsoft's desktop software revenue was $4.97 billion, up 9 percent for the June quarter. For the full fiscal year, revenue was $18.9 billion, a 7 percent increase from the prior year. Strong uptake for Windows XP helped fuel Microsoft's OS business, and Windows XP and Windows 2000 Pro now represent about 60 percent of all business OS license sales, executives said. In addition, Microsoft is seeing more uptake of Office XP via volume licensing deals including wins with Glaxos Smith Klein and the U.S. Air Force.

Enterprise software and services revenue was $1.35 billion for the fourth quarter, up 4 percent from the prior year. For the fiscal year, revenue was $5.11 billion, up 6 percent from the prior year. Revenue for the Windows server family of products grew by 13 percent during the quarter and 10 percent for the full year. The company also scored strategic server application wins with Toyota, Hilton, Nasdaq and SunTrust bank, executives said. "Revenue for enterprise software was up 102 percent from last year as customers took the opportunity to add more servers to their volume licensing," Boggs said. Microsoft also expects to see a large "renewal pipeline" for Office XP, Windows and server license in fiscal year 2003, executives said.

Overall, Microsoft provided conservative guidance for its first fiscal quarter and fiscal year 2003 based on economic uncertainty. Microsoft expects revenue next quarter in the $7 billion to $7.1 billion range, income of between $2.9 billion and $3 billion and earnings per share at between 42 cents and 43 cents. For fiscal year 2003, executives expect Microsoft revenue to fall between $31.4 billion and $32 billion, profit of between $13.3 billion and $13.6 billion and earnings per share of between $1.85 and $1.91.

We had a good year on a relative basis," said Connors. "We continue to face significant risks and challenges--Linux is a threat as are other companies," said Connors. "The competitive environment, the threat of litigation and ongoing legal action and global financial markets in a state of flux has created uncertainty. Our expectation is that things will improve modestly throughout the year. If the markets weaken, it will certainly impact consumer confidence and IT spending."