Preface

One of the key tenets of negotiation is “knowledge is power”. Analyzing Microsoft®’s Quarterly earnings report for the fourth 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 Q4.
  2. Microsoft®’s Licensing Revenue Summary for FY 2012, Q4.
  3. Risk Factors
  4. Predictions for the next Quarter as well as new products that will be launched during 2012 – 2013

 

Summary of the Financial Results

Revenue and Operating Income (FY12 4th Quarter)

Revenue for the quarter was $18.6 billion, up 7% or $1.2 billion. Operating income was $6.9 billion up 12%. Earnings per share was 73 cents, up 6%. Cash flow from operations was $7.7 billion, up 29%. And for the full year, it was a record $31.6 billion.

 

The analysis for this quarter is an interesting one, as this was the first time ever that Microsoft® has had to announce a quarterly loss. In reality, this is more of an accounting adjustment resulting from a write-down associated with Microsoft’s® 2007 purchase of aQuantive Inc., a digital advertising company. Added to this, Microsoft® also allocated $540M to the Windows® Upgrade Offer which is a consumer incentive program designed to protect current PC sales in preparation for Windows® 8.

 

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Contribution per Segment

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  • Windows®: The Windows® and Windows® Live Division struggled this quarter. Microsoft® reported revenue of $4.145 billion for the quarter, down from $ 4.743 billion in last year’s Q4 result. The reason given for the $500 million slip was the Windows® upgrade offer. In addition, Microsoft® indicated that the PC market was generally flat during the quarter. Business PC sales were up 1%, but consumer PC sales decreased 2%. With the launch of Windows® 8 set for October, it would be expected that customers begin to hold off on purchases of Windows® 7 although Microsoft® expressed satisfaction at Windows® 7 adoption.
  • The Server & Tools business posted $5.092 billion in second quarter revenue, a 13% increase from the prior year period. Once again SQL Server® and System Center sales showed strong growth of 20%. This is a strong showing considering Windows Server® 2012 is due for release this year.
  • The Microsoft® Business Division reported $6.291 billion in second quarter revenue, a 7% 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. Lync® revenue grew by 45% Microsoft Dynamics® business also grew by 7%.

 

Volume Licensing Revenue Summary (Q4 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.

 

Enterprise demand for products and services drove strong multi-year commitments resulting in multi-year licensing revenue growth of 14% and a record unearned revenue balance of $20.1 billion, up 17% over the previous year.

 

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 Conditions 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.  Adoption of Windows® 8 and Office 2013®: Although dominant on PCs and Laptops, Microsoft® has a strong competition when it comes to mobile devices, specifically tablets. Windows® 8 and Office 2013® have taken significant steps into that arena and it will be interesting to see what the rate of adoption will be.

 

Mobile devices have become an important component of business productivity. It would certainly be in your interests to evaluate these new releases. It is also in Microsoft’s® interest to invest in ensuring these new technologies are adopted. It is a good time to leverage this goodwill in the form of Business Investment funding from Microsoft® and heavier discounts.

 

2.  Adoption of Windows Server® 2012 and associated licensing: In line with the System Center® 2012, licensing Windows Server® 2012 is also moving to a per-processor model. Windows Server® in the enterprise is limited to a Standard and Datacenter edition, depending on the extent of the virtual environments. This will have costing implications depending on the number of processors you are using in the Datacenter.

 

If your current Windows Server® licenses include Software Assurance, it is important to comply with the transition requirements when renewing your agreements. If you provide a time-stamped report from a tool such as the Microsoft® Assessment and Planning Toolkit (MAPS) you will be able to transition to the actual number of processors in your server farm.

This is more cost effective as the alternative is that Microsoft® only converts current licenses as opposed to taking the physical server deployment into account. If you are running four and eight processor servers, the cost savings will be significant.

 

3.  Customers not deploying new technologies:

Microsoft® is concerned about new technologies not being implemented as it puts the renewal of the agreements at risk

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. 

 

Understand the Road-map: 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. This is specifically relevant when it comes to online services.

 

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®.

 

FY13 Predictions and Roadmap Information

  • The general expectation is that CIOs will continue to invest in cloud solutions to deliver productivity and scalability to their business.
  • Microsoft® is expecting to defer $1.0 – $1.2 billion for the Windows® Upgrade offer and pre-sales to the Original Equipment Manufacturers (OEMs)
  • Microsoft® is expecting low double digit growth in licensing revenue in the Microsoft® Business Division.
  • For the Servers and Tools Division, Microsoft® believes that customers are moving from transactional licensing to multi-year licensing agreements. The company expects that multi-year licensing will make up approximately 60% of the division’s revenue, with revenue growing low teens.

 

Product Releases

Product DescriptionProduct Description
Windows® 8
Anticipated release: Q4 2012
Windows Server® 2012
Anticipated release: Between Q3 2012 and early 2013
Internet Explorer® 10
Anticipated release: Between Q3 2012 and early 2013
Office® 2013
Anticipated release: Q4 2012 or Q1 2013
Exchange® 2013
Anticipated release: Q4 2012
Visual Studio® 2012
Anticipated release: October 2012
Dynamics® ERP Online
Anticipated release: September or October 2012
Office® 365
Anticipated update schedule: “Almost weekly”
Windows Azure®
Rumored CTP release: Q3 2012
SharePoint® 2013
Anticipated release: Q4 2012

Nov 2016