Digging for Diamonds in Microsoft's Quarterly Filing

Baseline Revenues
First off, Microsoft reported an increase in revenues of 30 percent to a record of $16.3 billion. But don't feel like you're trailing the market if your firm didn't do 30 percent more business in the fourth calendar quarter of 2007 than in the same quarter of 2006. For one thing, Microsoft had a weird accounting situation this time. They're comparing results to a quarter when they deferred $1.64 billion for technology guarantee programs. You remember: Because Windows Vista and Office 2007 shipped too late for holiday shoppers, Microsoft had to calm down OEMs by offering vouchers so people could upgrade for free or at lower cost if they bought systems before Vista shipped. The result was that sales Microsoft made in October-December 2006 got credited to the January-March period of 2007. Take that deferral out of the results, and Microsoft's revenues were 15 percent higher than the year-ago quarter.

OEMs and Premium Mixes
The OEM channel still accounts for 80 percent of Windows client revenue. Meanwhile, Microsoft's strategy of increasing the percentage of customers who buy so-called premium editions of Windows for the desktop is paying off. In the 10-Q, Microsoft's filing reads, "The OEM premium mix increased eight percentage points to 75% compared with the second quarter of last year." Not so long ago that mix was about 50-50 of premium editions versus standard editions. Then again, not so long ago there was only Windows XP Home Edition, considered "standard," and Windows XP Professional Edition, considered "premium." Then Microsoft added Windows XP Tablet PC Edition and Windows XP Media Center Edition. And on the Windows Vista side, only Windows Vista Home and Windows Vista Home Basic are "standard" editions. Tipping the scales on the "premium" side are Windows Vista Business, Home Premium, Ultimate and Enterprise. Premium editions, obviously, bring more profit to Redmond.

Server Revenues
On the server side, the sales increase is a little lower -- Microsoft had a 12 percent increase in server and server application revenue for the quarter. That's compared to about 18 percent real growth in Windows client revenues. The growth on the server side came primarily from Windows Server and SQL Server, Microsoft stated without providing specifics.

Dynamics Boom
Microsoft Dynamics customer billings were up 26 percent quarter-over-quarter. For the half, Dynamics billings were up 24 percent. Are you seeing results like that in the channel?

Foreign Exchange Rates
Here's one more reason to feel better about your results if they're not matching up to Microsoft's, at least if you do business only in the United States: Like many global corporations, Microsoft benefited from the weak dollar. On server and tools revenue, the company estimated that foreign currency exchange rates accounted for a four percentage point increase in revenues for the quarter. For the Microsoft Business Division, which includes Office, the estimate was a five percentage point increase.

More Microsofties, and Services Activity
If you're bumping into more Microsoft employees around the industry, there's a good reason. In the last year, the company increased headcount by 12 percent overall. Some of those heads wound up in Microsoft Consulting Services. According to the filing, "Consulting, Premier and Professional product support increased $146 million or 28% during the three months." A little algebra puts the total revenues for those activities for the quarter at about $667 million. Microsoft attributes the increase to "higher demand for consulting and support services in corporate enterprises."

Posted by Scott Bekker on January 30, 2008