"Revenue growth was primarily driven by increased Windows Server / SQL Server revenue, increased licensing of the 2007 Microsoft Office system and Windows Vista, and increased Xbox 360 platform sales." Favrourable foreign exchange rates were responsible for an incremental $542 million in revenue. Here's a transcript from Microsoft's earnings call, key Metrics Below.
Since the earnings report was released - MSFT has dropped below $26 and will likely decline futher, next week. Clearly, investors & analysts remain concerned that the company is spending too much time and resources trying to grow it's Online Services Business. I reviewed the comments which the Microsoft CFO made - addressing concerns about the Online Spend in FY08 and guidance for FY09.
Transcript From The Earnings Call - & Insights/Inline
”I will start with an overview of our broad strategy and then provide details into the additional investments. With the online ad spending expected to reach $80 billion by 2012, this area represents one of the largest growth opportunities for the company. We segment the market for online advertising in four distinct categories -- Search, Advertising Platforms, Information Content, and Communication/Social networking. For search, we’re focused on driving query share improvements and business model innovation, specifically in the area of high value commercial search. Our recent release of Cashback is a good example of executing on our strategy, which combines innovation in the shopping experience with a shift in the distribution of advertiser economic towards the end users. Additionally, we also [seek to win] targeted distribution through OEMs, ISPs, ISVs, and retailers. The recently announced deal with HP in the U.S. is an example of [this].”
WC: Although the online advertising market has slowed in recent months - as evidenced by Google’s results, there’s still plenty of potential for online advertising to snatch a larger share of Billions spent on global advertising WW. Search Advertising remains one of the most cost effective online advertising mediums so the top search engines are positioned to continue to grow revenue. However, building, maintaining and constantly improving a Search Engine is a very expensive endeavor. In Microsoft’s case, it’s made even more so, because the company doesn’t yet have the scale to challenge Google on Syndication/Distribution deals. (Recap: Search is key to driving online advertising revenue – which is forecasted to continue to grow rapidly and take share from the traditional $100B Global advertising Market. There are no half measures with Search – if you’re in, expect to spend billions developing global data centers, hiring talented technologists and improving core features & functionality).
“Turning to the ad platform, our strategy can be summarized as consolidate [when in] display, and there we are focused on integrating our advertising assets into a single comprehensive system that can deliver our publishing partners’ industry leading yields and our advertisers optimal return on their ad spend.”
WC: The purchase of aQuantive helps make the Microsoft ad platform offering – even more robust. Once the various systems have been integrated with one another – the Online Services Group will be well positioned strong reporting functionality to its clients. This helps optimize campaigns, improve overall ROI and drive customer loyalty/ retention. (Recap: Strong ad Platforms are the backbone of any Global Online Advertising Business. Key Investments in reporting infrastructure, will help drive online advertising revenue World Wide and provide Microsoft with a distinct competitive advantage in the online advertising space)
“In the area of communication and social networking, which includes our mail, messenger, and social networking assets, such as Spaces, we’ll deliver the leading end-to-end experiences across the PC, phone, and web. And finally, in the category of information content, we plan to invigorate our MSN portal experience with improvements in user experience, social media consumption, and premium content.”
WC: As an avid MSN User, I’m happy to hear that the company plans to improve the overall user experience of the portal and closely integrate its communication tools (messenger/hotmail), with useful, relevant, proprietary content. I’m not sold on the whole concept of Social Networking – as a revenue generating medium, however I believe it’s a key piece of the puzzle. There are only 2 global general interest portals – Yahoo & MSN. Both have similar features – and though Yahoo has been the stronger portal in the US, it’s been losing volume & reach lately. If MSN can become the undisputable Top Portal, it will draw even more Display Advertising revenue – especially from Large Companies – looking to build brand awareness online or start an interactive dialogue with Internet Users. Google can’t offer this type of value proposition through its Search Engine – so it’s a distinct opportunity for Microsoft, one the company should certainly invest in.
“So about two-thirds of the incremental spend that we are planning is related to investments to drive usage of our search offering. We’re dialing up our search distribution initiatives with targeted OEM toolbar [alt] search deals, scaling search globally with investments in localized engineering and data centers, pursuing acquisitions and partnerships to build vertical content to support our commercial strategy, accelerating the rollout of our Cashback program, and increasing marketing in the business to grow awareness and drive traffic. Second, we are upping the investments in our ad platform and increasing the number of advertisers and high quality inventory on that platform. Specifically, these investments are in the area of accelerating the integration of our ad platform assets, expanding our sales and service capabilities, small acquisitions to enhance the platform technology, and investments in strategic partnerships to increase third-party inventory available to advertisers on our ad platform. “
WC: I don’t know how much money Microsoft may have to spend in order to reach competitive relevance parity with Google. I’m not sure how many Syndication and/or Distribution deals would be required to help drive query share growth – or how long it will take. I do know that the Online Advertising Business worth Billions of dollars & it’s still growing. There are only two Global Players – Microsoft is one of them and the other is Investing as much, perhaps even more – in its Online Services and Offerings.
Key Metrics:Revenue:
- $15.84 vs. 15.65 billion consensus
- EPS: $0.46 cents vs. $0.47 consensus
- Operating Income: $5.684 vs. $5.8-$6.2 billion guidance
- Q1 Revenue Guidance: $14.7 billion - $14.9 billion
- Q1 EPS Guidance:$0.47 or $0.48 vs. $0.49 consensus
- 2009 Revenue Guidance: $67.3 b - $68.1b vs. $67.29 billion consensus, $66.9-$68.0 billion prior guidance
- 2009 EPS Guidance: $2.12 to $2.18 vs. $2.16 consensus
- 2009 Operating Income Guidance: $26.3 billion to $26.9 billion vs. $26.7-$27.4
-> Client: $4.37 billion vs. $4.19 billion est.
-> Server/Tools: $3.74 billion vs. $3.67 billion est.
-> Online Services: $838 million vs. $949 million est.
-> MBD: $5.26 billion vs. $5.37 billion est.
-> Entertainment/Devices: $1.58 billion vs. $1.55 billion est.
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