Color on 3Q FY 2008 Microsoft Numbers

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 combating 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 (IBM) and Oracle (ORCL) 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).