Vista, Office 2007 drive Microsoft profits up

Vista, Office 2007 drive Microsoft profits up

Microsoft posted a record 65 percent third-quarter profit gain Thursday that was driven by sales of its new Windows Vista and Office 2007 lines, both of which exceeded the company's own estimates, said its CFO.

"We are clearly pleased with our performance in Q3," said Chris Liddell during the earnings call. "Windows Vista and Office 2007 are off to a very good start."

The company's client division, responsible for Windows on the desktop, grew its revenues 67 percent over the same quarter last year, and climbed 103 percent over the previous quarter. Liddell credited the strong start of Windows Vista for the big boost in the group's numbers. Office 2007, which came out of the business division, was the quarter's other pillar. Its revenues increased 34 percent year-to-year, and 38 percent quarter-to-quarter. "Actually MBD [Microsoft Business Division] is the real success story," Liddell said.

The numbers looked better for both the client and business divisions, however, because of the US$1.67 billion Microsoft shifted from the second quarter to the third to account for free or discounted upgrade coupons issued to customers between October 2006 and the January launch of Vista and Office 2007. Without that deferred income, total revenues for the quarter would have posted a 17 percent year-to-year gain, just over half the 32 percent increase that Microsoft recorded with the $1.67 billion addition.

For Vista, the deferred income -- Microsoft dubbed it "technology guarantee" on the financial statements -- amounted to $1.18 billion. Minus the coupon income, the client group would have set gains of only 30 percent year-to-year, not the 67 percent Liddell touted.

According to Liddell, sales of both Vista and Office 2007 beat internal expectations. Vista's revenues were up $300 million to $400 million over estimates, while Office sales were $200 million better than anticipated. Vista's better-than-forecast gains were in part due to a more favorable sales mix of higher-priced Vista versions. "The premium mix is coming in above expectations," said Liddell, using Microsoft's terminology for Vista editions such as Home Premium, Business, and Ultimate. He said premium versions made up 71 percent of OEM Vista sales, driven primarily by Home Premium.

"We think we are going to see a continuation of this trend [toward premium SKUs]," said Liddell.

When a financial analyst asked for a breakdown of Vista's sales by version, however, Liddell pleaded ignorance, saying he did not have those numbers and would have to check with the Windows division before disclosing them. In late March, Microsoft trumpeted the sale of 20 million copies of Vista in the first month after its Jan. 30 release.

Microsoft's fiscal fourth-quarter forecast shows that the Vista and Office 2007 revenue jumps won't be sustained. Liddell said that the client division's revenue should increase 14 percent to 15 percent over the same quarter last year, while the business group should see a 13 percent to 14 percent gain.

Going forward, however, Liddell made it clear that Microsoft is counting on Vista and Office 2007 to fuel several years of growth. For fiscal 2008, which for Microsoft starts July 1, he projected that client operating system sales would break 85 percent for Vista, 15 percent for Windows XP. "That's very healthy for Vista," Liddell said, and represented a higher percentage of client sales than did Windows XP in its first year after release.

The strong Vista numbers outlined Thursday were in contrast to CEO Steve Ballmer's February admonishment that the financial community was "overly aggressive" in its sales forecasts.

Shares of Microsoft jumped $1.20, or 4.1 percent, to $30.30 in after-hours trading. The stock ended the regular trading session on the Nasdaq Stock Market at $29.10, up 11 cents.

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