Microsoft's first-quarter results reflect a recent reorganisation of the company's business units, with some groups breaking out revenue and profits for the first time. Under the old structure, Microsoft reported revenue for desktop applications, desktop operating systems, enterprise software, and other divisions. But the older organisation of business units made it more difficult to discern the extent of operational weaknesses and strengths. Under the new structure, Microsoft reports revenue and profits for seven divisions: Client, Information Worker, MSN, Home and Entertainment, CE/Mobility, Server Platforms and Business Solutions. The Client group includes desktop and embedded operating systems; Information Worker is made up of Office, other standalone applications, and professional product support; MSN refers to the online network and access services; Home & Entertainment includes the Xbox game console, consumer hardware and software, PC online games, and TV technology; CE/Mobility refers to mobile devices; Server Platforms is made up of server operating systems, .Net servers, developer tools, premiere support and consulting, training certification, and Microsoft Press books; and Business Solutions includes Great Plains, bCentral and Navision. For the first quarter, the Client, Information Worker and Server Platforms groups pulled in profits of $4.88bn. The two desktop groups -- Client and Information Worker -- brought in $4.36bn in profits. "Windows and Office still remain the cash cows," Silver said. "This shows why Microsoft is afraid of Linux and StarOffice -- because they threaten these cash cows and the means of expanding into new business opportunities." By contrast, MSN lost $97m on $531m in revenue; Home and Entertainment lost $177m on $505m in sales; and Business Solutions lost $68m on $107m in sales. The CE/Mobility Group, which includes Pocket PC and Microsoft cell phone software racked up $33m in losses on sales of $17m. Still, some of Microsoft's loss leaders showed improvements. During the same period a year earlier, MSN losses reached $199m on revenue of $431m; Home and Entertainment lost $39m on $74m in sales; Business Solution losses topped $68m on sales of $236m; and the CE/Mobility Group lost $48m on $14m in revenue. For the first quarter, the four money-losing business units combined accounted for $1.16bn of Microsoft's $7.74bn in revenue, or about 15 percent. But the groups only sapped Microsoft profits by about 8 percent. Windows tops Office
The more startling statistic may be the continuing trend of Windows becoming more important to Microsoft revenue and profit than Office. During the first quarter, the Client -- or desktop Windows -- group accounted for 37 percent of revenue and 61 percent of profits after factoring in losses from four other divisions. Information Worker, which is largely made up of Office, accounted for 30 percent of revenue and 46 percent of profits. (Losses in other groups allow profit figures here to add up to more than 100 percent.) A year earlier, the Client group represented 34 percent of revenue and 58 percent of profits compared with the Information Worker unit's 31 percent of revenue and 51 percent of profits. "Windows is again a bigger part of the income component than Office," Silver said. "This is a significant change from a few years ago when Microsoft derived most of its profits from Office." Silver noted that both products benefit from two advantages: huge market share in their respective categories and recent changes to how Microsoft licenses software. In August, Microsoft fully enacted its Licensing 6 program, where customers pay up front annually under two or three contracts for discounted upgrades. Gartner estimates the plan raised the majority of customer fees anywhere from 33 percent to 107 percent. The program affects Office and Windows more than most other Microsoft products, analysts say. One telling statistic may shed light on how Microsoft fares in markets where it does not control huge market share. Profit margins for desktop versions of Windows came in shy of 86 percent, according to the 10-Q. That's up from about 82 percent during the same period a year earlier. Office profit margins were 78 percent in the first quarter compared with 76 percent a year earlier. Licensing 6 likely contributed to the profit-margin gains, analysts say. By contrast, Windows Server, which according to IDC held less than 50 percent server market share in 2001, had 34 percent profit margins. A year earlier, Windows Server profit margins topped 26 percent.
See the Finance News Section for the latest financial news in the high-tech sector.
Have your say instantly, and see what others have said. Go to the Finance forum.
Let the editors know what you think in the Mailroom.
