Print - WinInfo Short Takes: Microsoft Earnings Announcement Special Edition

An often irreverent look at some of the week's other news, including the Microsoft earnings announcement, and... well, actually, it's just about the Microsoft earnings announcement. Hey, it happens sometimes. But seriously, it was a big deal...

WinInfo Blog

Short Takes

- Shock and Awe: Microsoft Earnings Blow Past Expectations

- Comparing Apples to Oranges. Or At Least to Microsoft.

- More on Microsoft's Earnings

- Even More on Microsoft's Earnings

- Home Premium is the Most Popular Vista Version, As Expected

- Xbox 360 Data Reveals Some Strength, Some Weakness

- PlayStation Creator Resigns from Sony

==== WinInfo Blog ====

by Paul Thurrott, thurrott@windowsitpro.com

This week, I was in Denver to cover for a coworker at the Windows Server "Longhorn" Roadshow. The weather was rough, but the biggest problem was that I had to give three presentations and was provided with only enough material for two presentations. Apparently, Microsoft was supposed to show up with Longhorn Server code and a Windows Server Virtualization demo but never did. So I had to wing it: The result was a "Top 10 Features in Windows Server Longhorn Beta 3" presentation, which I've since translated into an article for the SuperSite for Windows (http://www.winsupersite.com). That's a nice case of "making lemonade," I guess, but imagine what it's like have to present the virtualization track at a show only a week after Microsoft delayed that technology six months, and you'll gain some insight into how I was feeling going into this event.

Huge irony of the week, part 1: The day after I got home from Denver, Microsoft shipped Longhorn Server Beta 3. I would have enjoyed having that a week ago.

Huge irony of the week, part 2: Two days after I got home from Denver, a laptop containing prerelease Windows Server Virtualization code showed up on my doorstep. I'm going to give the laptop to the person presenting the virtualization track at the next roadshow, which just so happens to be in Boston, but I would have really enjoyed getting that a week earlier as well.

Huge irony of the week, part 3: I realize none of these occurrences are really ironic, but I enjoy the fact that most people think they are. I guess I'd just say that this course of events has been deflating. Or irritating. Or maybe just typical.

Stupid moment of the week: Instead of checking the weather online before I flew to Denver, I checked it using the print version of the "New York Times," which has a weather page with a grid listing the weather for the next three days in every major city in the United States. According to the paper, the temperatures in Denver for Monday through Wednesday were supposed to be 80, 75, and 78 degrees, which sounded lovely, so I packed shorts, t-shirts, and no jacket. Upon arriving in Denver, however, the pilot used words such as tornado, sleet, snow, and rain. Turns out I had inadvertently looked at the weather for Dallas. Yeah, I'm an idiot.

Leo and I recorded another episode of the Windows Weekly podcast yesterday, which should be up today, tomorrow, or soon thereafter. Check it out on the SuperSite for Windows or at http://www.twit.tv/ww.

Sorry if this week's Short Takes seems a little unidirectional, but with the wellspring of financial data that's been coming out of Microsoft since last night, it made sense to just focus on that. Sure, other stuff happened this week, but there's so much baloney about Windows Vista in the press lately, such as "Windows Vista=Windows Me II?" that I felt some reality needed to be injected into the equation.

==== Short Takes ====

An often irreverent look at some of the week's other news

by Paul Thurrott, thurrott@windowsitpro.com

Shock and Awe: Microsoft Earnings Blow Past Expectations

We often joke about how Microsoft makes a billion dollars every quarter, but this time the company really did: Last night, the software giant announced profits of almost $5 billion on revenue of a whopping $14.4 billion in the first quarter 2007, both of which are records for Microsoft and huge gains over the same quarter last year (when the company's profits rose 65 percent and its revenue was up 32 percent). Microsoft credited unexpectedly high sales of Windows Vista and Microsoft Office 2007 for the boost, and backed that up with numbers: Its Windows client division brought in $5.27 billion, up 67 percent from a year ago, and the division responsible for Office 2007 saw sales rise 34 percent to $4.83 billion. Microsoft said that the Windows sales mix for the quarter was 85 percent Vista, 15 percent Windows XP. You can try to paint Vista as a failure, but the reality is that the latest version of Windows is off to a smoking start. Don't believe the FUD.

Comparing Apples to Oranges. Or at Least to Microsoft.

Industry darling Apple released its first calendar quarter 2007 financial results earlier this week, and the press reacted with the usual amounts of hyperbole and glee. Let's compare the results from Apple and Microsoft, shall we? Apple's revenue of $5.26 billion was about one-third of Microsoft's. Microsoft's profits last quarter were six and a half times bigger than those of Apple's, which made $770 million. Why is this amount notable? Apple was widely applauded for increasing its margins, but the reality is that Microsoft's profits are about two and a half times greater per dollar made than those of Apple. Although Apple gets all the good press--analysts were quoted as just being "relieved" at Microsoft's announcement yesterday--Microsoft is actually doing quite a bit better than Apple. And that's why the situation with the company's stock prices—Microsoft's stocks are mired around $30 while Apple's have surged past $100--doesn't make any sense. It's interesting to see how differently these companies are treated, and not in a way that makes sense given their actual performance.

More on Microsoft's Earnings

But let's not get off-track. Looking more closely at Microsoft's quarterly earnings, some other interesting figures emerge. The division responsible for the Zune and Xbox 360--neither of which are setting the market on fire right now--saw sales unexpectedly drop 21 percent to $929 million. Microsoft's online services revenue actually rose 23 percent year-over-year to $623 million, despite Microsoft's continued problems battling Google in the online services market. Best of all, Microsoft's increasingly important server division saw sales rise 15 percent to $2.75 billion, with its income up 32 percent to $979 million. (And not to beat this comparison to death, but Microsoft's server division made more profit last quarter than all of Apple's products combined. I guess you need to sell an awful lot of iPods to match the power of all those client access licenses.)

Even More on Microsoft's Earnings

Allow me to predict one of the weak complaints Vista bashers will make about Microsoft's financial results: They'll charge that Microsoft's earnings last quarter were artificially inflated because the company previously deferred revenue from the free and low-cost Vista upgrades offered during the 2006 holiday season. So is it true? According to Microsoft, the company deferred $1.67 billion in revenue from the last calendar quarter of 2006 until the first calendar quarter of 2007, or about $1.14 billion in profits. But even without that one-time gain, Microsoft's revenue would have been up 17 percent. More to the point, the slice of the pie that Windows is responsible for would have still jumped a whopping 30 percent. Microsoft CFO Christopher P. Liddell said that regardless of trends, sales of Vista were $300 million to $400 million higher than the company’s internal projections. Sales of Office 2007 were about $200 million higher than expected.

Home Premium Is the Most Popular Vista Version, as Expected

One of the interesting factoids that came out of Microsoft's earnings report is that the premium versions of Vista--mostly Vista Home Premium, but also Vista Ultimate--account for about 71 percent of all Vista versions bundled with new PCs. That percentage represents an 18 percent jump year-over-year compared with sales of premium XP versions (primarily XP Media Center Edition 2005).

Xbox 360 Data Reveals Some Strength, Some Weakness

Microsoft said it sold just 500,000 Xbox 360 consoles last quarter as demand for the console decreased after the holiday season. Last quarter's sales puts the worldwide installed base of the console at about 11 million units. The good news is that more than six million of those Xbox 360 owners are members of Xbox Live, Microsoft's online service, and the Xbox 360 accessory attach rate in the United States remains at record levels. Looking ahead, Microsoft said that the division responsible for its Xbox 360 and the Zune will be profitable by the July quarter. I won't hold my breath.

PlayStation Creator Resigns from Sony

This week, PlayStation creator Ken Kutaragi announced his resignation as chairman and CEO of the Sony Computer Entertainment division. Kutaragi will stay on through June, after which time he'll serve as honorary Sony chairman and senior technology adviser (read: be put out to pasture). Kutaragi's departure is no coincidence: His latest console, the PlayStation 3, is overpriced and not selling well because of his decision to use expensive and hard to manufacture components in a bid to overpower the Xbox 360. That strategy has backfired: The technologically inferior Nintendo Wii continues to outsell both the Xbox 360 and the PlayStation 3, and the Xbox 360 retains enough key advantages over the PlayStation 3 to prevent Sony from dominating the market. In March, retailers in the United States sold 259,000 Wiis, 199,000 Xbox 360s, and 130,000 PlayStation 3s. In the previous generation of consoles, the PlayStation 2 controlled 70 percent of the video game console market. As for the official reason for Kutaragi's resignation, Sony said that he's "decided to pursue his dreams beyond PlayStation." As have gamers, apparently.

I have a theory on why Apple gets all the media attention, and Microsoft doesn't: 1. The majority of media uses Apple products to make their product, and Apple users tend to be, um, strong advocates for their company 2. Apple is perceived as an "underdog", and Microsoft is perceived to be a huge, evil corporation. What better story than to have the "underdog" win against the evil corporation? Also, is it just me, or does Paul seem to obsess over weather issues?

The Zune is dragging down MS's entertainment division profits. Its DRM'd filesharing 'social' feature is a flop, it's an ugly turd brown color, the installer is riddled with problems, and the ten people who actually bought one will never bump into each other on the street to feel each other's pain or attempt to squirt each other. I give it three million out of 742 Paul Heads on the SuperSite!

I'm confused. There were posts here recently saying that Apple was tossing Microsoft around. And now Microsoft posts record profits.

It's pretty easy to post profits as being from Vista when they're counting systems sold with XP and a coupon to upgrade. How many people actually went through with it (or for that matter, stuck with it after that)?

@stevejobs I'm guessing the vast, vast, majority stuck with Vista. It is such a *huge* improvement over XP, I can't see why *anyone* would go back to XP, except for app./driver compatibility issues.

"they're counting systems sold with XP and a coupon to upgrade" sorry to say, but they didn't. especially not in the channel either. XP

I look around and all my Windows friends who are buying PC's are wiping them and putting XP back on. People who held off buying PC's until Vista was released are trying to find XP drivers on the vendor sites so they can downgrade. Of course, that means they've now bought two OS's from MS, which doesn't hurt their profits at all... When I've asked them why they'd want to downgrade, they've answered with everything from sluggishness to not liking the look and feel to application incompatibility. And before you say I'm just a pro-Mac troll, keep in mind they're sticking with Windows for the most part, just not Vista. Although at least three friends have said outright that this will be their last PC since XP is going away.

Guess what Paul. Microsoft is a much bigger company than Apple...... and they have been for a long time. For a years you were able to gloat over Apple's declining market share and poor(ish) figures. Now that Apple's results have been reversed, with record sales and increased profits (nearly every quarter for the last 2.5 years!).... the only ploy left to you is.... "yeh but MY dad is bigger than your Dad". All of the statisiics you talk about. (Dell sells 10 times more computers than Apple. Microsoft makes 6.5 times Apple's profits)..... well all these have been falling for the last couple of years. What the analysts see in Apple is a company that is growing fast and has the potential to gow even faster.

The funniest was New York Times online. For over a day, the top tech headline was something that talked about how Apple had zoomed past MS. Yesterday evening, it was quietly moved to a corner of the tech page along with Microsoft's earnings report.

Hey, Microsoft had a great quarter, good sales and profits. What's not to like? And they're brilliant...they're apparently making a fortune off actual products (Vista), piecces of paper (licenses) and xBox subscriptions (which cost them virtually nothing). So the physical xBox and Zune don't make any money? So freakin' what? They're loss leaders and vanity projects for a company that can certainly afford to have them. This whole "Microsoft vs. Apple" comparison is specious at best. They compete--directly--in so few areas, it's almost not even worth mentioning. And given that the one of the most popular pieces of software available for Microsoft's OS is made by Apple (and vice-versa), we'd all be better off to recognize that while a little competition never hurt anyone, neither did a little cooperation. Bravo, MS. Well done.

@lotsa - good post!!! I pretty much agree with you. The same can be said about Apple and iTunes. They make lots of money on the iPod...but very little on iTunes(comparitively) "we'd all be better off to recognize that while a little competition never hurt anyone, neither did a little cooperation." - I like to call that coopetition!!! --tayme

"Sure, other stuff happened this week, but there's so much baloney about Vista in the press lately (example: "Windows Vista = Windows Me II?") that I felt some reality needed to be injected into the equation. Anyway, here we are." I don't get it. Vista is better than XP. BTW, usually we take one item in the Weekly Short Takes and talk about it. This time, the Short Takes is dedicated to that one item. Anybody try running Vista on a Mac Mini?

"Anybody try running Vista on a Mac Mini?" I haven't seen Vista running on a Mini, but I do know of a local company using XP on a Mini to run presentations. They never use it as a Mac--they liked the form factor of the Mini, so that's what they use. it runs XP flawlessly. Since y'all keep saying that Vista is so much better and more efficient than XP, I'm assuming it would run quite well on that same Mini.

"I have a theory on why Apple gets all the media attention, and Microsoft doesn't:" I've been around long enough to remember when Apple was on its last legs, and the media was burying the body. Business Week ran a cover titled, "The Death of an American Icon" with the Apple logo--the same week that we were justifying new Macs for my department. I'll never forget the VP slamming that issue down on the desk of my boss. The Apple story is one of great drama: Two guys in a garage--one a hacker and the other a master showman--start up a huge company that really does, in many ways, change the world. You have the rise and fall of Steve Jobs, the return of the prodigal son, the near-death and amazing resurgence of the company, and the revolutionizing of the way music is listened to and sold. It's a great story. It's great drama. And you're right--the press eats that stuff right up. It's much the same way it was with Chrysler during the Lee Iacocca years. Great drama leads to great stories. And the Apple saga is not without its drama.

"For over a day, the top tech headline was something that talked about how Apple had zoomed past MS. Yesterday evening, it was quietly moved to a corner of the tech page along with Microsoft's earnings report." Why is this unusual? Headlines are by their very nature "of the moment", and online editions change headlines and top stories more often than Paul changes his mind about the Zune.

"Why is this unusual? Headlines are by their very nature "of the moment", and online editions change headlines and top stories more often than Paul changes his mind about the Zune." I didn't say it was unusual. NY Times is one of the publications that has regularly pointed out that Vista is not doing well and these articles invariably made it to the front page of NYT online. Even when they talked about Apple's earnings, it was relative to Microsoft Windows. When Microsoft released its earnings, all these stories were pushed to some corner on the technology and business pages, along with the one about Microsoft's earnings. I guess this goes to prove that news about Microsoft's failures is a better read than that about its successes.

"It's much the same way it was with Chrysler during the Lee Iacocca years." Well, not to get too off topic here, but Chrysler is pretty much back in the dumps. Daimler bought them for a pretty princely sum back in the day, and now they are looking to get rid of them, at a huge loss. Point well taken, although I wouldn't want to use that analogy simply because the end ultimately is failure. One of the things I clearly have noticed here is that we all running in circles treading water. We are all waiting for someone, anyone, to say something that is even the least bit provocative to pounce on them and start the same arguments over and over. As I mentioned in a previous thread, I think we are all just so conditioned (and burned) from the bonch experience. "And given that the one of the most popular pieces of software available for Microsoft's OS" Acrobat? Just kidding, I know you mean iTunes/QuickTime. I however do prefer to use the K-Lite Mega Codec Pack, with the Real and QuickTime Alternative and Media Player Classic. Nothing beats being able to have one, simple player for ALL formats.

The reason MS has such high profits is that they charge monopoly profits. Corp IT - where MS makes most of its money -- all run MS and they simply can't switch. There's no viable alternative (outside of servers). When your customers can't switch, you can charge too much money. Is this really that difficult for you PC guys to figure out?

Hey look Paul, someone agrees with you.... sort of. http://www.microsoft-watch.com/content/corporate/microsoft_q3_2007_by_the_numbers.html ""Without the deferral, revenue growth would have been 17 percent, which is in line with past performance," Wilcox reports."

"""Without the deferral, revenue growth would have been 17 percent, which is in line with past performance," Wilcox reports."" Yes, so I guess MS isn't allowed to spend that money, what with it being 'fake' or something? --- Not too shabby MS. 1bn raw profit a month is quite impressive... especially with all these 'sink' projects that should be starving you to death. Selling pieces of paper and CDs is working smart, not hard ;) But I have to say, Google is working the smartest. Heck, they don't even sell tangible goods.

"The reason MS has such high profits is that they charge monopoly profits." Nice try. Cut the price of every single MS product in half. They still would have made over 2.3Bn in one quarter. Without having the luxury of selling a computer that costs over 5000USD.

@Will Your theard on the Apple post with John was very informative and very positive. Great job! >Cut the price of every single MS product in half. They still would have made over 2.3Bn in one quarter. Without having the luxury of selling a computer that costs over 5000USD. I am not sure selling a box for $5000 is a luxury when Apple throws in the software to maintain the 28%-35% margins. Congrats to Microsoft and their shareholders. Vista (SP1)

Paul wrote a good article. I found his comparison between Microsoft and Apple entertaining, but I agree with lotsamystuff ... there's little direct competition among products and services. But Paul's point about analysts praising Apple and expressing only relief for Microsoft is a VERY VALID POINT! Oh, and I live in the front range of Colorado ... 80 degrees in Denver in APRIL??!! HAHAHAHAHAHAHA! Here's the seasons in Colorado: There are 8 months of winter, 2 months of spring, 2 months of fall, and summer usually falls on a Tuesday.

@mwrisner He must have been in a *big* hurry. I can't imagine Denver, Colorado being 80 degrees in April! Over here in Portland, Oregon, there isn't any weather. It either rains or it doesn't. :-)

"But Paul's point about analysts praising Apple and expressing only relief for Microsoft is a VERY VALID POINT!" The reason the analysts are liking Apple, at the moment, is that analysts like growth! I agree that these are strong figures for Microsoft .... however without the deferred revenue Microsoft's figures would be: Revenue. 12.55 B Profit. 3.79 B That's 17% and 27% year on year growth. Apple Revenue. 5.26B (4.36 2006) Profit. 0.77B (0.41 2006) That's 21% and 88% year on year growth.

""The reason MS has such high profits is that they charge monopoly profits." Nice try. Cut the price of every single MS product in half. They still would have made over 2.3Bn in one quarter. Without having the luxury of selling a computer that costs over 5000USD. will84 April 27, 2007" Right, MS's monopoly-propped prices are so high you need to cut them more than in half.

Note also that most of the profits come from corporate license agreements - not OEM PC sales.

"Right, MS's monopoly-propped prices are so high you need to cut them more than in half." Ahh, I see, so we should cut it down till their profits are less than Apple, that would make it 'right' right? Heh. Well fine then, I think Apple's profits are so high because of their monopoly prices on MP3 players. Should we continue this argument on the front of "I'm rubber, your glue", or is recess over and we have to step out of the reality distortion field?

What Paul Thurrott doesn't want you to know about Microsoft's quarterly results--they deferred revenue from last quarter so they could inflate this quarter's numbers: http://www.microsoft-watch.com/content/corporate/microsoft_q3_2007_by_the_numbers.html

once again, the troll broke his bridge, flooding the channel with his sewage once again. XP