Relieved by an increase in multi-year licensing renewals, Microsoft plans to invest US$900 million in sales and marketing to drive up the numbers for Vista, Office 2007 and Xbox 360 in FY07.
Buoyed by improving multi-year license renewals, Microsoft will invest $900 million in sales and marketing to drive Vista, Office 2007 and Xbox 360 deals during the 2007 fiscal year, executives said Thursday.
In a conference call today detailing its fourth quarter and 2006 fiscal year results, Microsoft Chief Financial Officer Chris Liddell said the software giant will spend US$450 million to launch and market those three key products over the next 12 months, and invest another US$450 million to strengthen its sales force and field sales organization to sell those major upgrades.
Liddell would not say when Microsoft will hold the official market launch of Vista or Office 2007. But he indicated that the company is on track to deliver the business editions of those upgrades to volume customers in November and to the general public in January.
Although Liddell predicted that the Vista and Office 2007 business won't likely begin to impact the channel until the second half of next year, Microsoft has already begin enjoying the fruits of its prolonged five-year labor to develop Vista and a more compelling version of Office.
A spike in licensing suggests the appetite for those products is growing among business customers, Microsoft said. For its full fiscal year that ended June 30, for example, Microsoft realized 19 percent growth in unearned revenues, to US$10.9 billion.
Roughly 25 percent of that growth came in during the fourth quarter alone, as customer anticipation for the release of Vista and Office 2007 grew, Liddell claimed.
After many quarters of disappointing Office 2003 revenues, unearned revenues for Microsoft's information worker division were up 28 percent over the prior year. And an increase in multi-year annuity deals for Office and other real-time communications products during the last quarter fueled 6 percent growth to US$3.1 billion, the CFO added.
"The shift to annuity signals stronger customer demand for Office 2007," said Liddell, who said he has seen a growing shift from license-only deals to multi-year contracts. "We had strong quarter for volume licensing. Renewals were on the high end of our range of 66 to 75 percent there's growing customer demand for new products."
Still, Lidell acknowledged that Microsoft is at the tail end of a major contract renewal cycle and that the numbers won't be as strong in the next quarter. He also expects healthy but more "modest" revenues for Vista-based PC shipments in FY07.
Due to the early recognition of revenues for renewals and multi-year deals, Microsoft expects only an additional "modest impact" of between $200 to $400 million from Vista and Office 2007 sales in FY07.
Goldman Sachs analyst Rick Sherlund took kindly to the growing pot of deferred revenues lining Microsoft's pockets.
"Microsoft reported a bit better than expected results for their fourth fiscal quarter and a big US$2 billion increase in deferred revenues," according to a Goldman Sachs report, authored by Sherlund, that was issued after Microsoft's earnings were released Thursday. "The large increase in deferred revenues of US$2 billion was above our US$1.3 billion estimate and likely reflects strong contracting activity for enterprise agreements to be recognized as revenue over time."
Microsoft reported a US$2.83 billion profit and diluted earnings per share of 28 cents during its fourth fiscal quarter, which ended June 30, 2006. Excluding a three cent charge for legal fees (to cover a fine imposed by the European Commission ), Microsoft would have reported earnings of 31 cents per share. The analyst consensus was 30 cents per share for the quarter.
For the fiscal year ended June 30, 2006, the company reported revenue of US$44.28 billion, an 11 percent increase over the prior year. Net income for the 2006 fiscal year was US$12.6 billion. Earnings per share were US$1.20.
Though profit fell last quarter (from $3.7 billion during the same quarter in FY05) and increased only slightly year over year (from 12.3 billion in FY05), Microsoft was very optimistic and offered a healthy forecast for its current fiscal year " to between $49.7 billion to $50.7 billion.
If the numbers tip to the higher end of that scale, it would mark a major milestone for the 31-year-old company: breaking the $50 billion mark.
One Microsoft system builder and solution provider that sells Microsoft licensing predicted it would be a good quarter " and year " for the company, hours before the release was posted. But he noted the big numbers don't always translate into good news for the channel.
"Their forward looking statements will be somewhat rosy because they have such a huge new slate of products they'll be releasing in the next year," said Todd Swank, vice president of marketing at Nor-Tech, Burnsville, Minn. "We've seen our Microsoft numbers increase over the past couple of quarters, but I've never seen a great correlation between our numbers and Microsoft's."