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Microsoft’s strong second-quarter financial results surprised not only analysts, but also the company’s own executives by coming in $300 million above the high end of their forecasts.
Microsoft also reported Jan. 24 a 30 percent rise in revenue, to a record $16.37 billion, in its fiscal quarter that ended in December, on the back of what company officials said were “robust holiday sales and enterprise demand.”
That success was in no small part due to hefty ongoing sales of Office 2007 as well as strong sales of Office for Mac, thanks to retail promotions, Chris Swenson, an analyst with the NPD Group, told eWEEK.
“Office 2007 sales literally doubled the sales volume that we saw for Office 2003 during the same point in time-the first 11 months on the market. If I look at all the dollars spent on software in the U.S. retail channel in 2007, Microsoft Office captured just shy of 17 percent of that,” he said.
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There was also solid growth in the U.S.retail channel in the quarter, from Oct. 1 to Dec. 31. Black Friday week sales, in terms of dollar volume, increased 65.8 percent compared with the same period in 2006, while Office for Mac sales surged 215.8 percent due to a special $100 rebate that Microsoft ran on Black Friday and a longer-running promotion where customers of Office 2004 for Mac could get the new Office 2008 product when it was released in January for a few more dollars, Swenson said.
“Clearly, those two promotions helped drive sales of Mac Office during the holidays, resulting in Office sales surging 50 percent year over year in terms of dollar volume. But Windows also performed strongly, with dollar volume up 40 percent year on year,” he said.
With regard to Windows Vista, sales of which have reached the 100 million shipped mark, Swenson said there was a sharp increase in the percentage of PCs that now ship with the new operating system, a number he expects to “really skyrocket when SP1 [service pack 1] is released in February.”
While more than 80 percent of the 100 million figure comes from the OEM channel as installations on new computers, a good chunk is for the full-packaged product. Retail data also showed that more than 95 percent of all PCs sold at retail have Vista installed.
“We’re seeing a dramatic rise in the percentage of PCs going out the door with Vista loaded,” he said.
Strong Enterprise Demand
Matt Rosoff, an analyst with Directions on Microsoft, agreed that Office was one of the highlights of the quarter, noting that sales of business products such as Office 2007 and SharePoint 2007 continue to be strong, while companies appear to already be covering Windows Server 2008 and SQL Server 2008 on multiyear license agreements.
“Overall, Microsoft’s revenue from multiyear license agreements is growing faster than the company expected, and faster than in recent years. That suggests strong enterprise demand. Demand seems to be high for the 2007 releases of Office and SharePoint Server and the forthcoming 2008 versions of Windows Server and SQL Server,” Rosoff said.
Adding to Microsoft’s financial strength is the fact that its Xbox business is finally contributing to the bottom line, even beating the company’s own expectations in terms of console sales, the games-per-console attach rate and Xbox Live memberships, he said.
Overall, PC sales grew around 15 percent, which helped software sales numbers, Rosoff said, adding that those businesses replacing their hardware are probably gradually deploying Vista.
Rob Enderle, an analyst with the Enderle Group, said that much of Microsoft’s large-business revenue is now institutionalized under enterprise agreements and are “relatively recession-proof.”
The outlook going forward also is strong, with the expected release of Windows Server 2008 in February, followed by Hyper-V hypervisor software within six months.
“Windows Server 2008 in particular has had a tremendous amount of interest, and the new Hyper-V offering seems to be picking up an unusual amount of IT focus for something this new,” Enderle said. “Demand for both seems surprisingly strong, but testing is still in the early stages, and so these are just initial indicators.”
On the downside, he said that ongoing speculation about the next version of the operating system, currently dubbed Windows Seven, and that it might be released in two years or less, is causing many businesses to consider skipping Vista.
“There is no enterprise movement to adopt Vista. SP1 may fix that, but I don’t yet have any hard evidence that it will, and the changing economic conditions are making it more difficult to justify a desktop operating system move,” Enderle said.