Microsoft still booming despite its size

Software titan Microsoft long ago lost its position as the wunderkind of the technology sector. That is a tag many people would associate more with Google these days.

Today, Microsoft’s persona is more akin to that of veteran computing corporations such as IBM or HP. The company is seen as far too rich for any but the most catastrophic of financial failures to seriously threaten its fortunes, but by the same token its capacity for growth is perceived as limited.

This makes its most recent financial results – in which the company reported a 27% year-on-year increase in quarterly revenues, from $10.8 billion to $13.7 billion – all the more remarkable. The activities of the Microsoft Business Division (MBD), home to its Office and Dynamics Business Applications ranges, were particularly impressive. MBD revenues shot up 20% in the company’s fiscal first quarter ending 30 September, pushing revenues for the three months to $4.1 billion.

The primary influence there was the release of Microsoft Office 2007, the latest version of its ubiquitous desktop productivity suite, but the company did report an 18% increase in Dynamics customer billings (more detailed figures were not revealed).

Despite the lukewarm early reception Vista received among the business community, the latest version of its Windows operating system spurred 25% revenue growth for the company’s Client division, with revenues rising to $4.0 billion in the quarter. As 80% of the Client division’s revenues are derived from software that is pre-installed on PCs, this growth was tied to a revival in the demand for PCs, both in business and among consumers. 

Microsoft’s server software segment also faired well, growing revenues 16% year-on-year to reach $2.9 billion.

The sole blemish on Microsoft’s accounts book was the online services division, which includes its search engine and online advertising system. Revenues there did rise (by 25% to $671 million) but the operating loss widened from $102 million in the year-ago period to $264 million this time around.

This prompted a moment of rare self-deprecation from Microsoft CEO Steve Ballmer, who told a conference in October 2007 that “in the world of search and advertising, Google is the leader; we’re an aspirant. We have a lot of work to do.”

It took IBM (which in October reported a more sedate revenue rise of 7%) a long time to concede defeat to Microsoft on the desktop – arguably until 2003 when it decided to stop shipping its OS/2 operating system. Given the war chest Microsoft is sitting on, it might be some time before it admits a similar defeat in its attempts to out-do young rival Google in the Internet services arena – if it ever gets to that point.

Intelligent Finance

Meanwhile, the synergies between business applications and business intelligence software – an increasingly strong card played by Microsoft – are spurring dramatic changes in both previously distinct sectors. In October, one of the pioneers of modern BI software, Business Objects, agreed to be acquired by German applications giant SAP. What SAP is getting its hands on for $6.7 billion became clearer two weeks after the acquisition announcement when the French BI company filed its report for the third quarter of fiscal 2007.

As far as revenue was concerned, the story was strong. Business Objects grew quarterly revenues year-on-year by 19% to $369 million. Services revenue – which includes consultancy and maintenance – grew 29% to $230 million, while the recent acquisition of two companies, Cartesis and Inxight, added $21 million to its revenue balance.

But its operating profit was less impressive. Quarterly earnings dropped by 68% compared to the same period in the previous year, from $29 million to just $11 million.

Two factors contributed to this steep drop in returns, the company said. Firstly, it incurred a $7 million charge following a legal dispute with Decision Warehouse, a channel partner in Latin American.

But more worryingly, its licence revenue grew by an anaemic 6%, indicating that it failed to attract the usual clutch of new customers over the reporting period. The many months of speculation in the lead up to its acquisition may have deterred new customers from signing deals and sent sales people scurrying to update their CVs.

Whether those cautious would-be customers will be emboldened or discouraged by the identity of its acquirer will now be a key factor in the business’s immediate future.

With Business Objects all but gone and another rival, Hyperion Solutions, swallowed by Oracle, BI and performance management software specialist, Cognos, needs to keep its numbers sweet if it is to retain its independence. Its latest financial statement, for the three months to 31 August, went some of the way to achieving that.

The Canadian company reported revenues up 10% to $254 million, although licence sales rose faster, up 12%, suggesting that Cognos has been more successful in attracting new customers, or selling more products to their existing customers, than some rivals.

Operating profits were up too, jumping from 14% from $23 million to $27 million. Having now acquired performance management provider Applix, Cognos is better placed to remain independent. Whether its shareholders want it to is another matter. Shares in the company reached a five-year high after the SAP/Business Objects deal was revealed.

Further reading

Microsoft's Dynamic aims Microsoft aims to add coherence to its Dynamics convergence message.

Business intelligence market consolidation  SAP buys Business Objects; Cognos buys Applix

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Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

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