Microsoft Corp. yesterday said that its Microsoft Business Solutions (MBS) business unit ended fiscal 2006 in the black on the strength of robust revenue growth and improved operational efficiencies in its recently concluded fiscal fourth quarter.
MBS's upbeat financials came as its parent company reported yet another period of record revenues, although its net earnings were negatively impacted by expenses tied to legal settlements and investments in its MSN business unit. The Redmond, WA, company also announced a $40 billion stock buy-back program aimed at stimulating its share value.
For the quarter ended June 30, MBS recorded operating earnings of $38 million, compared with a loss of $84 million in the like period last year. The profit was MBS's second of the fiscal year, enabling the business unit to eke out an operating profit of $24 million for the full year on revenues of $919 million. MBS posted $803 million in revenue in fiscal 2005.
Interestingly, the fiscal 2006 profit came a full year earlier than the company's revised projections -- which followed multiple financial setbacks in fiscal 2005. The profit was fueled by a confluence of events: MBS's improved operating leverage, which helped to lower spending; the delivery of long-promised functional enhancements across its enterprise applications lines (now marketed as Microsoft Dynamics); a weeding out of weaker channel partners and the provision of better selling tools to remaining resellers; and improved marketing and technical support, analysts said. MBS was also the beneficiary of a strong economy, and growing demand for enterprise applications in its sweet spot, -- the mid-market -- they added.
The synergies of the new Microsoft Dynamics brand, coupled with more efficient marketing spend, is paying dividends for MBS, noted Ray Wang, an analyst with Forrester Research in Foster City, CA. "[Microsoft also] has a better channel with superstar partners that are much more organized, and armed with the right tools," he added.
The results speak volumes. MBS's top line increased 16% from the corresponding quarter in fiscal 2005 to $280 million -- in line with expectations voiced earlier this year -- and well above the "low-teens" double-digit growth projected at this time last year. Enhancement revenue (i.e., license extensions, maintenance, and other services) also increased 16% in the period.
Fourth-quarter licensing revenue, meanwhile, grew 15% year over year to $23 million, fueled by continuing strength of the unit's Dynamics CRM 3.0 product and the emerging potency of its ERP software. Analysts pointed to the delivery of Dynamics AX (Axapta) 4.0 as evidence that MBS has its ERP act together.
Citing corporate policy, MBS declined to quantify growth by product line, vertical market or geography -- nor detail from which vendors it is taking business. "The growth has come from a variety of places, but mostly it has come from consolidation of smaller vendors, as well as growing with the overall market," an MBS spokeswoman wrote in an e-mail exchange with Managing Automation.
Colleen Healy, Microsoft's general manager of investor relations told financial analysts on a conference call to discuss the company's year-end results that MBS added over 50,000 new Dynamics CRM users during the quarter. " ... the product grew rapidly across all segments, geographies, and industry verticals," she pointed out, noting that growth came both from licensed implementations as well as off-premises on-demand delivery.
The MBS spokesperson could not provide any additional detail on the new users, but said that Dynamics CRM is used by 7,000 customers with over 200,000 users total.
MBS's strong results came on the same day SAP detailed its second quarter results, which came in below analysts' and the company's expectations. In a conference call with analysts, SAP pointed to strength in its Business One and All-In-One applications suites -- which, like Microsoft Dynamics, is aimed at the mid market.
Among the key wins MBS disclosed in the quarter was a deal with The Spring Air Co. (Elk Grove Village, IL), the world's fourth-largest bedding manufacturer. The 80-year-old company plans to use Microsoft Dynamics AX to power its manufacturing, distribution, and financial operations, Microsoft said.
Still, MBS remains a microscopic piece of Microsoft's overall business.
For the fourth quarter, Microsoft posted record revenues of $11.8 billion, a 16% increase over the same quarter last year. Operating income for the quarter was $3.9 billion, a 30% increase from the prior year period. Net income declined from $3.7 billion, or 34 cents a share (including five cents of legal charges and nine cents in tax benefits) in fiscal 2005's fourth quarter, to $2.83 billion, or 28 cents a share (including 3 cents in legal charges). Operating income for the fourth quarter included legal charges of $351 million, compared with $756 million in the prior year period.
For the fiscal year, revenue reached $44.3 billion, an 11% increase over fiscal 2005. Operating income for the fiscal year was $16.5 billion, a 13% spike from fiscal 2005. Operating income included $1.1 billion for legal charges, compared with $2.1 billion in the prior year period.
Net income for the fiscal year was $12.6 billion or $1.20 per share (including eight cents of legal charges and a penny of tax benefit). In fiscal 2005, Microsoft posted net income of $12.3 billion, or $1.12 per share (including 13 cents in legal charges and nine cents of tax benefits).
Beginning in fiscal 2007, MBS's results will be reported as part of the company's new Microsoft Business Division (MBD), which includes its Office applications and communications products. For fiscal 2007, CFO Chris Liddell told analysts Microsoft expects MBD's revenues to grow between 3% and 5% in the first quarter and between 9% and 10% for the year, driven primarily by the release of Office 2007.
"We also expect strong demand from Dynamics' products, building off the momentum from fiscal 2006," he said.
The MBS spokesperson said Microsoft does not break out revenue or profit projections for business units by product line contribution.
Overall, Microsoft expects fiscal first quarter 2007 revenue to be in the range of $10.6 billion to $10.8 billion. Operating income is expected to be in the range of $4 billion to $4.2 billion, or between 30 cents and 32 cents a share. For fiscal 2007, Microsoft expects revenues to be in the range of $49.7 billion to $50.7 billion. Operating income is expected to be in the range of $18.9 billion to $19.4 billion, or $1.43 to $1.47 a share.
Microsoft's stock buy back plan, meanwhile, consists of a $20 billion tender offer scheduled to be completed on August 17, as well as authorization for an additional $20 billion worth of shares to be repurchased by June 30, 2011. The company recently completed a previously announced $30 billion stock repurchase program.