Microsofts revenue for the fiscal year to end June 2007 topped the $50 billion mark on the back of solid performances from its core operations and the release of Windows Vista, Office 2007 and Exchange Server 2007.
The software maker, based in Redmond, Wash., reported July 19 that revenue for the full fiscal year was $51.12 billion, 15 percent higher than it was the previous year.
Diluted earnings came in at $1.42 a share for the year, while Microsoft returned over the year some $31 billion in cash, or 175 percent of operating cash flow, to shareholders through share buybacks and dividends.
“Revenue growth was primarily driven by solid customer acceptance of these new products, as well as increasing sales of existing products such as SQL Server, Windows Server, Visual Studio and Xbox 360 consoles,” Chris Liddell, Microsofts chief financial officer, said in a statement released after the markets had closed on Wall Street for the day.
The company also posted its financials for the fourth quarter of the financial year to June 30, in which revenue was up 13 percent to $13.37 billion over the same period of the previous year.
Diluted earnings for the quarter were 31 cents per share after the more than $1 billion in charges related to Xbox 360 warranty policies Microsoft came in for. Had those charges not been taken, earnings would have come in at 39 cents per share, an increase of 26 percent over the same period of the prior year when adjusted for certain items.
“Surpassing $50 billion in annual sales is a testament to the innovation and value that our product groups delivered into the marketplace, as well as the outstanding execution by our field sales, marketing teams and partners to bring that value to life with our customers,” Kevin Turner, Microsofts chief operating officer, said in a statement.
But Allan Krans, an analyst at Technology Business Research, believes the results reflect Microsofts strategy of gaining revenue at the expense of profitability. “Although Microsoft proudly proclaimed that its revenue for fiscal year 2007 passed the $50 billion mark, the achievement of that goal came at the expense of profitability,” he said.
“Despite billions of dollars of investment in its online and entertainment divisions, Microsoft has yet to turn these divisions into profitable growth engines that will drive the company through the next 10 years. … Its core operating system and productivity business remain strong in terms of profitability, but revenue growth over the next five years will be tied to sales of the underlying PC hardware, which is not expected to grow at high-single-digit rates after 2007,” he said.
Microsoft also faces serious competition in both the operating system and productivity markets from online competitors such as Google and open-source alternatives like Linux, while a possible erosion of its customer base would make it increasingly difficult to maintain strong domination of the desktop operating system and applications market, he said.
Krans also pointed out that on the same day that Google posted revenue growth of 58 percent and an operating margin of 33 percent, Microsofts online services division reported revenue growth of 18.6 percent from a much smaller base and negative operating margin of 34.7 percent for the quarter.
With regard to the competitive front, Krans said that while TBR does not believe the recent agreement between Google and Salesforce.com will have a significant impact on Microsoft, a stronger alliance between the two companies in the future would.
“If the two companies realize even moderate success working with each other under this agreement announced, there is potential for greater integration between Googles online application offerings and Salesforce.coms CRM services. Microsoft reported strong customer demand for accessing business applications through the familiar Office interface, and TBR believes a tighter integration between Google and Salesforce.com could provide similar functionality delivered via an online medium,” he said.
TBR expects Google and Salesforce.com to continue working in partnership over the next two years to leverage their respective strengths and move toward an integrated online product set that competes directly with Microsofts offerings, Krans said.
Looking to the 2008 fiscal year, Turner said the company would “continue to drive growth through new product offerings, such as Windows Server 2008, Visual Studio 2008, SQL Server 2008, Office PerformancePoint Server 2007, and Microsoft Dynamics Live CRM.”
CFO Liddell echoed that sentiment, saying the results for the fourth quarter “cap off an extremely strong fiscal year for the company. We have healthy core businesses and are strategically investing in growth opportunities, which will build on our success and contribute to continued double-digit revenue and earnings growth in fiscal year 2008.”
Microsofts management also gave its guidance for the current quarter of its 2008 fiscal year to Sept. 30. It expects revenue of $12.4 billion to $12.6 billion, with operating income of between $5.0 billion and $5.2 billion and diluted earnings per share of 38 to 40 cents.
For the full fiscal year to June 30, 2008, Microsofts management expects revenue of between $56.8 billion and $57.8 billion, with operating income of $22.2 billion to $22.7 billion and diluted earnings of $1.69 to $1.73 a share.