10-QPeriod: Q2 FY2007

MICROSOFT CORP Quarterly Report for Q2 Ended Dec 31, 2006

Filed January 25, 2007For Securities:MSFT

Summary

Microsoft Corporation reported results for the quarter ended December 31, 2006, showing a slight increase in revenue to $12.54 billion, up 6% year-over-year, but a significant decrease in operating income to $3.47 billion, down 25%. This decline in profitability was attributed to revenue deferrals related to upcoming product launches (Windows Vista and the 2007 Microsoft Office system), a shift towards lower-margin products, and increased operating expenses, particularly in headcount-related costs. Despite the profit dip, the company continued its substantial share repurchase program and declared a quarterly dividend, signaling confidence in its financial health and commitment to returning value to shareholders. The company also highlighted strong performance in its Server and Tools segment and growth in Entertainment and Devices, driven by the Xbox 360 and the new Zune device.

Key Highlights

  • 1Revenue for the quarter reached $12.54 billion, a 6% increase compared to the same period in the prior year.
  • 2Operating income decreased by 25% to $3.47 billion, primarily due to revenue deferrals and increased investment in new products and headcount.
  • 3The company recognized a $1.6 billion revenue deferral from the Express Upgrade to Windows Vista and Microsoft Office Technology Guarantee programs.
  • 4Server and Tools segment revenue grew 17% year-over-year, driven by SQL Server, Windows Server, and Visual Studio.
  • 5Entertainment and Devices segment revenue saw a significant increase of 76%, largely due to strong Xbox 360 console sales and the launch of the Zune device.
  • 6Microsoft continued its aggressive share repurchase program, buying back approximately $6.0 billion of its common stock during the quarter.
  • 7The company declared a quarterly dividend of $0.10 per share, reflecting ongoing commitment to shareholder returns.

Frequently Asked Questions

The decrease in operating income was primarily driven by a $1.6 billion revenue deferral related to the "Express Upgrade to Windows Vista" and "Microsoft Office Technology Guarantee" programs. This deferral means revenue that would have been recognized in the current quarter will be recognized later upon the consumer launch of these products. Additionally, increased investment in upcoming product launches, a shift towards products with lower profit margins, and higher headcount-related costs contributed to the decline in profitability.

Microsoft is implementing "Technology Guarantee" programs where customers purchasing current versions receive free or discounted upgrades to Windows Vista and the 2007 Microsoft Office system upon their consumer launch. This has resulted in a significant revenue deferral of $1.6 billion in the current quarter, which will be recognized upon product availability. The company expects a significant revenue increase in the third quarter of fiscal year 2007 as this deferred revenue is recognized.

The Server and Tools segment continues to show strong growth (17%), driven by SQL Server, Windows Server, and Visual Studio. The Entertainment and Devices segment experienced significant revenue growth (76%), fueled by Xbox 360 sales and the new Zune device. However, the Client and Microsoft Business Division segments saw revenue declines, primarily due to the aforementioned revenue deferrals for upcoming product launches. The Online Services Business faced challenges with declining access revenue offsetting advertising growth, leading to an operating loss.

Microsoft remains committed to returning capital to shareholders through a combination of share repurchases and dividends. During this quarter, the company repurchased approximately $6.0 billion of common stock under its authorized repurchase program and declared a quarterly dividend of $0.10 per share. The company's substantial cash reserves and ongoing profitability support these capital return initiatives.