Preface

One of the key tenets of negotiation is “knowledge is power”. Analyzing Microsoft®’s Quarterly earnings report for the third quarter of the Financial Year 2012 will provide valuable information as you prepare to negotiate your licensing agreement.

The document is structured in the following way:

  1. A summary of the financial results for FY2012 Q3.
  2. Microsoft®’s Licensing Revenue Summary for FY 2012, Q3.
  3. Risk Factors.
  4. Predictions for the next Quarter as well as new products that will be launched during 2012.

 

Summary of the Financial Results

Revenue and Operating Income (FY12 Quarter 3)

Revenue for FY12 Q3 (ended March 2012) was $17.41 billion, a 6% increase from the same period the previous year. Operating income was $6.37 billion, up 12% from the year before. Net income and diluted earnings per share for the quarter were $5.11 billion and $0.60 per share, compared with $5.23 billion and $0.61 per share, respectively, in 2011.

 

revenue

 

revenue_vs_operating_income

 

Contribution per Segment

  • Windows: Business PCs grew by 8% as businesses move to Windows 7 and Office 2010. Microsoft® believes that 40% of Enterprise Desktops are now running Windows® 7. Considering that most of Microsoft®’s competition is Windows® XP and Vista and that support on XP has been discontinued, some analysts are questioning whether this number should be higher.

 

windows_and_windows_live_division_results

 

  • The Server & Tools business posted $4.57 billion in second quarter revenue, a 14% increase from the prior year period. Sales in SQL Server® and System Center drove the business. This is expected due to the release of the 2012 versions of these products. It is still early days to determine the influence the new product use rights will have – specifically the move to per core licensing with SQL Server® and the fact that the products within System Center can no longer be purchased individually. Enterprise Servers also grew by 20%.

 

server_and_tools_results

 

  • The Microsoft®Business Division reported $5.18 billion in second quarter revenue, a 9% increase from the same period the previous year. The main contributors of growth were SharePoint®, Lync® and Exchange. The strongest growth came from Lync® which seems to suggest a growing understanding of the value of the Unified Communications solution.

 

microsoft_business_division_results

 

Volume Licensing Revenue Summary (Q3 FY12)

Unearned revenue from volume licensing programs represents customer billings for multi-year licensing arrangements paid either at inception of the agreement or annually at the beginning of each billing coverage period. Also included in unearned revenue are payments for post-delivery support and consulting services to be performed in the future.

 

For the quarter under review, unearned revenue was $15.2 billion, up 17%. Microsoft® appears to be succeeding in its goal of moving much of its revenue to predictable multi-year volume licensing.

 

Risk Factors

We discuss in detail the risks facing Microsoft® when we analyse the Financial Year. For more information on the identified risks, refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of Microsoft®’s SEC filings. These can be obtained at http://www.Microsoft.com/investor/

 

For the sake of this document, I would like to highlight three significant risks for Microsoft® over the next two quarters. Understanding these risks will provide you with leverage when negotiating your agreement.

 

1.   Increased flexibility from licensing agreements

Increasingly blog articles are focusing on Microsoft®’s lack of flexibility when it comes to tailoring the Enterprise Agreement to business needs. Added to this, Microsoft® has recently made some changes to the Product Use Rights for System Center 2012 and SQL Server® 2012 that impact on costs significantly. A whole new model for assessing Return on Investment is required when considering these products.

 

The biggest risk to Microsoft® is organizations not renewing their agreements. One of the reasons organizations sign longer-term agreements is price predictability. Microsoft® is being criticized for not communicating the changes effectively enough and introducing complicated licensing models that make it difficult to create business cases.

 

When negotiating your license agreement, put the onus on Microsoft® to provide you with a comprehensive business case. Insist on the agreement meeting your business requirements and know the components of the agreement that are up for negotiation. Leverage Microsoft®’s concerns regarding non- renewal to gain concessions.

 

2.   Adoption of Cloud Services

At each quarterly update, we have noticed that Microsoft® refers to new customers who have adopted Office 365. What they are not providing is real revenue growth versus expenditure or market-share numbers. The company has invested heavily in Cloud Services and it is difficult to know whether current adoption rates are where Microsoft® expected them to be. Microsoft® is increasingly emphasizing “Private Cloud” versus “Public Cloud” which is significant considering the investment required for a public Cloud infrastructure.

 

Microsoft®’s cloud solutions are still in early adopter phase, and so there will be investment funds and resources available to ensure revenue growth in Office 365 and Windows® Intune. If Office 365 is part of your road-map, make sure you leverage the fact that Microsoft® would be concerned about reaching growth targets.

 

3.   Adoption of New Releases

A concern expressed by one of the analysts is that the pace of new releases is going to lead to customers skipping versions of the product. This is specifically relevant to Windows® 8, Office 15 and Windows® Server 2012. If the adoption rate of Windows® 7 in the enterprise is only at 40%, there is a risk that many organizations would be hesitant to upgrade to Windows® 8. Considering the current technologies are both stable and effective, there is a real concern that customers will wait for future releases as it is becoming difficult to provide enough reasons for the upgrade.

 

To ensure continued revenue, it is in Microsoft®’s interest to encourage you to sign a multi-year licensing agreement. Before you do this, make sure signing the agreement makes economic sense. Microsoft®’s concerns regarding maintaining revenue streams is also something you can leverage in order to gain the concessions you might require.

 

FY12 Predictions and Roadmap Information

  • Microsoft® expects multi-licensing revenue to grow by double digits in the Microsoft® Business Division.
  • The focus on reducing operating expenses continues.
  • Microsoft® is expecting continued momentum from the launch of Visual Studio® 2012 and System Center 2012.
  • Between now and December, Microsoft® is expecting to launch Windows® 8, Windows® Server 2012, Visual Studio® 2012 and Office 15.

 

There are a significant number of product launches over the next twelve to eighteen months. Becoming involved in Microsoft’s Technical Adoption Programs means you have access to high level resources, licensing discounts and business investment funding from Microsoft®.

As mentioned previously, Microsoft is also concerned about new technologies not being implemented as it puts the renewal of the agreements at risk. Being aware of the product road-map not only allows you plan more effectively and maximize your IT budgets, but it provides you with the knowledge necessary to effectively negotiate agreements that meet your business requirements.

Nov 2016