IT Investment Research

Let's count 'unlicensed PCs' as 'Linux sales'

Reading the Microsoft (MSFT) third quarter FY 2008 conference call transcript confirms my April 24 opinion that Q3 FY 2007 was too tough of a compare and an earnings report designed to take a lick.

Every company with its track record gets a pass for one quarter and this is Microsoft's turn. [Of course, Microsoft would argue that it doesn't need a pass; just do all the arithmetic about the "technology guarantee," it says. But that's a lot of IRbabble.]

But the color on top of the 3Q FY 2008 Microsoft numbers is more interesting:

1. An emphasis on "unlicensed PCs." A lot of discussion on the conference call centered around how well Microsoft client software (i.e., Vista and XP) sales were compared to overall PC sales. Microsoft's theory is that when its client-division sales growth outpaces PC growth including sales of "unlicensed PCs," it is doing a good job combatting piracy. That has been the case in the fiscal year ending June 2008 but Microsoft and financial analysts are predicting the numbers will turn around in the second half of 2008.

Another explanation for the growth of "unlicensed PCs," if it occurs later in 2008, might be the growth of open source software such as Linux. Perhaps these PCs are not unlicensed (so that pirates can put Vista or XP on them) but just unlicensed in terms of a Microsoft operating system product?

2. Growth outside the U.S. Microsoft now says it is getting two thirds of its business from outside the U.S. Some of that is currency fluctuation based but it still represents a large change from a few years ago (whereas other IT Top 12 suppliers such as IBM and Oracle have achieved more than 50% of their revenue from outside the U.S. for years).

Obviously, the reason is that that is where the money is. 15% of its revenue is coming from what Microsoft called "high-growth emerging markets" (that is, not the EU, where Microsoft is losing money by the bucket full as it continues to pay off the EUrocrats to play a game that is less than zero sum).

Microsoft Q3 financials: I hope they are stuffing business back in the drawer

It looks to me like Microsoft decided that the "technology guarantee" reveal was holding down the compare of Microsoft's third quarter of FY 2008 with 3Q FY 2007 so much that the company just stuffed business back in the drawer.

In fact, when aQuantive results from the first calendar quarter of 2007 are backed in, I think the compare is negative.

At least I hope that is what is happening because otherwise there might be signs of the slowing economy in Microsoft's numbers.

But picking the midpoint of their Q4 FY 2008 guidance gets them back on an up curve with a healthy finish to their year (ending June 30). At least I hope that's what's going on here.

In fact, I'm going to skip the conference call and read the transcript in the morning. Somebody will ask them about constant currency I'm sure. Because I sure hope that's all that is happening here.

(I'm waiting for SAP and CA to report during the week of April 28 in order to do my trailing 12-month analysis of the IT Top 12. It still looks like Microsoft will be fourth or fifth among that group. I hope.)

-- Dennis Byron