Diving Deep into Microsoft's Q1 Results

Everyone's seen the top line for Microsoft's first quarter, and, coming as it did a day after the Windows 7 launch, Wall Street was impressed.

The price of MSFT went up nicely in spite of revenue declines of 14 percent year-over-year and an earning-per-share decline of 17 percent. (To its credit, Microsoft didn't count $1.7 billion in revenues for Windows 7 deferrals and OEM pre-orders, meaning the company did slightly better than the official numbers indicated.)

It's nice to see the stock rewarded, given how Microsoft for years delivered insane growth year after year and never got any kind of stock bounce. I used to somewhat buy the argument that Wall Street traders knew what they were doing when they valued Microsoft stock as flat despite constant revenue and profit growth. After the last year, though, I lost all confidence that the market ever had any idea what any company is really worth.

Of course, here at RCPU, we don't care so much what Wall Street thinks as for what's revealed for partners by the financial reports. With that in mind, we've done our usual close read of the Microsoft quarterly report with the U.S. Securities and Exchange Commission.

Stuff that caught our attention this time:

• Microsoft Dynamics revenues declined 6 percent in the first quarter, compared to the year-ago period. This is especially interesting because it's the first time Microsoft has talked about Dynamics revenues. In the past, Microsoft used the vague phrasing "Dynamics customer billings," which we could never get anyone to define. Last year, such billings were up 10 percent in the July through September quarter, down 7 percent in the October through December quarter, down 8 percent for the January through March quarter, and off 7 percent for the full fiscal year that ended in July.
  
  The upshot: It's still extremely tough out there on the Dynamics front. It's hard to say, given the change in reporting from billings to revenues, though, whether the 6 percent revenue drop points to a sequential improvement over whatever the fourth quarter drop in billings were, or not. In all, this is a positive reporting change toward a tangible figure. Next, maybe Microsoft could say what Dynamics revenues actually are in dollar terms?
  
  
• The segment of the channel that's occasionally worried about competition from Microsoft Consulting Services may get some relief from this data point from the 10-Q: There was a "decline in demand for consulting services." The amount wasn't specified, but the decline was cited to explain a decrease in cost of revenue of $69 million in the Server and Tools business unit.
  
  
• Microsoft estimates that worldwide PC shipments from all sources for the July 1 to Sept. 30 period were somewhere between flat and 2 percent growth. Hey, flat is the new up.
  
  
• OEM revenues dropped $207 million, or 6 percent, and that's counting the otherwise deferred revenues associated with Windows 7. Part of the reason for the dip in OEM revenues (which account for about 80 percent of Windows Division revenue) is an 8 percentage point decline in the OEM premium mix to 63 percent. According to the report, that's "primarily driven by growth of licenses related to sales of netbook PCs, a decline in premium editions sold to business customers, and changes in geographic mix."
  
  
• Server and tools revenue was impressively flat, with an improvement in operating income of a whopping 23 percent. Inside those numbers, Windows Server and developer tools revenues were declining, while Enterprise CAL Suites and System Center revenues went up.

Posted by Scott Bekker on October 26, 2009