Microsoft Earnings Show Strong Enterprise Software Business

• By Jeffrey Schwartz
• 01/25/08

While Microsoft's record revenues of $16.4 billion and earnings of $4.7 billion for the second quarter put the spotlight on strong sales of Vista and Office, Redmond's latest financial report also showed steady growth in its server and tools business.

The company last night released its quarterly revenue report and raised its estimates for the second half of its 2008 fiscal year, which ends June 30. Revenues jumped 30 percent for the quarter over the same period last year, or 15 percent without revenue deferrals from Microsoft's enterprise multiyear license agreements.

"The last two quarters consecutively have been the best two quarters in terms of growth across the business that Microsoft has had in a long time probably in this decade," said Directions on Microsoft analyst Matt Rosoff.

On the cusp of the largest enterprise launch next month, the report shows the server and tools business showing 15 percent revenue growth for the last three months of the 2007 calendar year.

On last night's earnings call, Microsoft's Chief Financial Officer Chris Liddell was bullish on next month's server and tools launch -- which includes the long awaited Windows Server, Visual Studio and SQL Server refreshes.

"Together these products will allow IT departments to be more productive, providing them with a secure, trusted, and manageable platform and which will underpin growth in the server and tools business over the next several years," Liddell told analysts.

The 15 percent increase in server and tools revenues for the most recent quarter showed a total of $3.3 billion, while profits exceeded the $1 billion threshold, totaling $1.1 billion, the company reported.

Microsoft's server and tools business has consistently grown in the 15 to 17 percent range in recent years, Rosoff said. While it's hard to say what that portends as the new crop of server products come out this year, Rosoff said the steady stream of multiyear license agreement is a positive sign.

"You have to read the tea leaves a bit, but if you look at the unearned revenue increase in the Server and Tools business group, it suggests that companies see enough value in those products to justify signing those multiyear agreements," Rosoff said.

Across all businesses, Microsoft was uncharacteristically bullish on the outlook for the rest of the year, pointedly at markets outside of North America. The company slightly raised its full year outlook from to $59.9 billion to $60.5 billion, a move that caught Wall Street by surprise.

Some other notable facts that came up in Microsoft's earnings report:

• Vista sales have now exceeded 100 million units, while its largest sales from the Windows client group came from Vista Premium Edition.
• A crackdown on piracy has contributed to overall growth.
• Consulting revenues rose 28 percent for the quarter.
• SharePoint is now a $1 billion business for Microsoft.

Liddell also told CNBC today that he was pleased with Microsoft's growth in online search but described that as a long-term work in progress: "On the search side, it's still early days. Clearly we're very happy the revenue growth was 38 percent for that particular division in the quarter, but that's a multi-year journey that we are going on, and we are still a long way from getting to critical mass."