Continuing its recent resurgence, Microsoft Corp.'s enterprise applications business operation posted fiscal second-quarter results yesterday that contained a nifty surprise: operating earnings of $10 million, on revenues that far exceeded earlier guidance.
The Microsoft Business Solutions (MBS) results shocker came as the Redmond, WA software giant registered record revenues for the quarter ended Dec. 31, 2005 of $11.84 billion, a 9% increase from the like period in fiscal 2005 -- a figure that lagged analysts' optimistic expectations. Net income for the quarter reached $3.65 billion, up 5% from year-earlier period, slightly beating the consensus outlook.
MBS, meanwhile, contributed to the record period with revenues of $242 million, matching a previous high-water mark for the business unit, achieved in the fiscal fourth quarter of 2005. Fiscal second-quarter revenues were up 17% from the year-earlier period, and were well above the 11% to 13% growth figure Microsoft projected in September with the release of its fiscal first quarter results. The $10 million operating profit compared favorably to the $29 million loss posted in the year-earlier period and the $12 million defict registered in the prior quarter.
In the period, new software license revenue grew 14%, while "enhancement," or software upgrade revenue, grew 24% from the year-earlier period. Although Microsoft didn't release MBS' services revenue information, in its 10Q filing with the Securities and Exchange Commission the company said the figure declined by 3% from the like period of fiscal 2005, continuing a trend that began last year when the business unit started turning over more of these activities to resellers.
"It was a good showing, not as good as SAP's, but they are finally doing what they told us they were going to do," noted Bob Paker, a vice president of Manufacturing Insights, a market research unit of IDC Corp. (Framingham, MA).
Microsoft officials attributed the unit's strong showing primarily to its long-delayed Dynamics CRM 3.0, which arrived to pent-up demand during the quarter, as well as the delivery of Dynamics GP 9.0 (formerly Great Plains) and Dynamics SL 6.5 (formally Solomon) -- enterprise and financial applications suites, respectively. The company didn't break out revenue growth by product line or market segment.
"Customer demand for our new Dynamics CRM 3.0 software has been above our expectations, and we are forecasting the recent strength to continue through the second half," noted Chris Liddell, Microsoft's chief financial officer, in prepared remarks delivered during a conference call with financial analysts to discuss the fiscal second-quarter results.
In fact, Liddell told analysts to expect MBS' revenue growth to reach 16% in the fiscal third quarter, matching the level reached in the fiscal first quarter. He added that the business unit would end fiscal 2006 with revenue growth of between 14% and 15%.
Liddell, however, cautioned analysts not to expect MBS to be consistently profitable in the current fiscal year, as Microsoft had previously promised. The reasons: continued investment in MBS' sales force and a planned global advertising campaign. Robust revenue growth, however, has the unit on a trajectory to reach consistent profitability in fiscal 2007, a company spokesperson explained in an e-mail response to a Managing Automation inquiry.
After experiencing a string of product delivery and channel confidence setbacks throughout early 2005, MBS seems to have gotten its act together. Even as MBS senior vice president Doug Burgum ceded his operational duties last fall, the business unit began making good on delivering a much-needed refresh of its CRM software suite and then shipping Dynamics GP 9.0, as it worked feverishly to do a better job of qualifying, training, and supporting its reseller partners, some of whom came out of the last recession in tough economic shape.
MBS then launched with third parties its first-generation of Dynamics AX (Axapta) ERP applications under its Industry Builder initiative that are aimed at specific industrial markets. The packages make use of Microsoft's .NET Web services architecture and are a key component of Project Green, an initiative to merge its numerous enterprise applications under a single architecture.
MBS' momentum has also been chronicled by a recent AMR Research Inc. (Boston) report entitled "Enterprise Resource Planning Spending Report, 2005-2006." MBS was cited by 58% of 271 IT decision-makers surveyed as the vendor they were most likely to purchase or upgrade their ERP software from in 2006. Oracle Corp. was mentioned by 57%, while SAP AG was selected by 49% of those surveyed.
AMR Research was unavailable at press time to discuss these findings, but according to the report ERP budgets are expected to grow 14.6% in 2006 with software comprising half of total spending. In a press release distributed by Microsoft, AMR research director and report co-author Jim Shepherd was quoted as saying that given the "huge surge" in ERP spending expected by companies of all sizes, 2006 "is bound to be a banner year for top vendors in this space."
MBS provided evidence of recent wins against competitors such as SAP and Oracle, though the former's recently posted calendar fourth-quarter results suggest that the German software giant is hardly suffering. MBS pointed to deals with Arnprior Aerospace Inc, a Boeing Corp. spinoff; Heritage Bag; and Fortune Fashion Co. as tangible evidence of its renewed traction.
Arnprior Aerospace Inc., which provides tolerance fabrication, precision machining, complex assembly, welding, conversion coating, and modern paint services, selected Microsoft Dynamics AX over Oracle and Epicor software Corp. The company plans to take its new ERP system live by May, an MBS spokesperson noted in an e-mail exchange.
Heritage Bag, meanwhile, selected Microsoft Dynamics AX and Microsoft's foundation technology over Oracle and a Unix/Linux solution to replace an aging legacy system, the spokesperson said. The solution includes two Dynamics AX Process Industry Builder Initiative (IBI) modules.
Fortune Fashion Industries, a $100 million apparel company, selected Microsoft Dynamics AX over SAP's All-In-One mid-market offering and Blue Cherry (an apparel industry-specific business management package). The deal covers the suite's financials, trade and logistics, and production modules, with Microsoft Demand Planner as the forecasting tool.
The strength of MBS, now a unit within a Microsoft Business Division focused on office productivity software, is reflective of expected continued growth across the company's various and sundry product lines for the remainder of fiscal 2006. For the third quarter ending March 31, the company expects revenue to be in the range of $10.9 billion to $11.2 billion. Operating income in the period is expected to be in the range of $4.5 billion to $4.6 billion.
For the full year ending June 30, revenue is expected to be in the range of $44 billion to $44.5 billion. Operating income is expected to be in the range of $17.9 billion to $18.3 billion, including $361 million for the first-quarter settlement charge.