REDMOND, Wash., July 30, 2007 — Two weeks ago Microsoft released a strong fourth quarter earnings announcement that showed a 13 percent increase in revenues over the same quarter last year.
Joe Matz, Corporate Vice President, Worldwide Licensing and Pricing at Microsoft
Volume licensing programs, and particularly Enterprise Agreements, were mentioned as one of the drivers of the results. The company’s Software Assurance program, which is a component of the Enterprise Agreements, provides additional technologies, technical support, training and the rights to the latest products for corporate customers. For fiscal year 2008, customers are poised to get even more value out of their Software Assurance agreements with new benefits such as the recently announced SharePoint Planning Deployment Services, designed to help customers take full advantage of Microsoft Office SharePoint Server 2007; a critical component to a People Ready Business.
To discuss the full value of the Software Assurance program and Microsoft’s Enterprise Agreement and volume licensing efforts in general, PressPass spoke with Joe Matz, recently promoted to corporate vice president of Worldwide Licensing and Pricing.
PressPass: Can you discuss the latest earnings figures in the context of volume licensing, Enterprise Agreements and annuity-payment programs?
Matz: A key component of Microsoft’s strong revenue performance for fiscal year 2007 was the growth we’ve seen in annuity billings which is driven mainly by our Enterprise Agreement offering. Forty percent of the company’s revenue mix resulted from multi-year license sales, and enterprise agreement renewal rates exceeded the high end of our historic range of 66-75 percent. To sum up, Microsoft’s volume licensing business is healthy and vibrant.
It was mentioned that Enterprise Agreement renewal rates are higher than a year ago. This is a very positive result for the year, and that speaks to the strength of our current product portfolio, our future product roadmap and the value that customers receive through programs such as Software Assurance. For fiscal year 2008, we have a full pipeline of new technologies that should continue to generate interest from customers and thus turn into sales.
The company recognizes revenue from contracts that contain Software Assurance over time and because of that you don’t always see the strength of the business in any one quarter. An important number to look at is “unearned revenue” that shows up on our balance sheet. Basically what we do is bill a customer for a payment, put the full amount on the balance sheet and then flow it into reported revenue over the payment term. Think of it like putting a big chunk of your paycheck in your savings account for future withdrawals.
If you look at how that number did, compared to where we guided to for the quarter, you can see that we did about US$600 million more in billings. That is a substantial amount of “upside” to our Software Assurance sales projections for a quarter. In fact, our Server and Tools business results were slightly lower than anticipated this quarter because of higher-than-expected growth in enterprise agreements, which flowed into unearned revenue but brought that team’s earned revenue down for the quarter. That may sound like a bad thing but it actually bodes well for future earnings.
In the Windows Client division, high enterprise renewal rates and new annuity sales drove a 25 percent increase in volume licensing unearned revenue balance. The Microsoft Business Division beat high-end guidance by about $200 million, with growth driven by Office Enterprise Agreements and SharePoint. In fiscal year 2008, Microsoft expects to see a continued increase in volume licensing sales on the Windows Client side, because more customers are taking advantage of differentiated technologies such as Windows Vista Enterprise and the Microsoft Desktop Optimization Pack.
PressPass: Why do customers choose to purchase Software Assurance or enter into an Enterprise Agreement? What’s in it for them?
Matz: Software Assurance was created for customers who want an ongoing technology, support and services to help them deploy and manage their software throughout their relationship with Microsoft. The purchase of Software Assurance or an Enterprise Agreement is optional and depends on an individual organization’s upgrade patterns, IT strategy, and whether predictable pricing and deeper vendor relationships are important to their business needs. Microsoft does not charge customers more if we ship more than one new version during the lifetime of a Software Assurance agreement. This shows that our goal is an ongoing, value-based relationship, and we think that our renewals this year and the 23 percent increase in customer satisfaction, or Customer Partner Experience (CPE), over the past two years, shows that customers believe we’re on the right track.
PressPass: There has been a lot of buzz in the media lately surrounding the value customer’s see in Microsoft’s Software Assurance. How do you reconcile such strong financial figures against assertions that customers are opting not to renew their agreements?
Matz: First off, let me say that the coverage I’ve seen is not consistent with what I’m seeing here at the company and hearing from other industry watchers. Microsoft has an ongoing relationship with many third-party analyst firms. Analysts are a great resource to customers during the purchase decision-making and deployment processes, and we work very hard to ensure the analyst community is well informed on our programs and policies.
That said, like any other third-party source, analysts draw their own conclusions about Microsoft’s programs — which they should. The market is better off with this additional perspective and feedback that they bring.
But we also recommend that customers rely on their Microsoft representative and local Microsoft Certified Partner for ongoing, direct and accurate information. These are the people on the ground who are able to assess an individual customer’s business situation — their existing systems, their people, their budget, their business and technology needs — and crunch the real numbers while also making sure the customer gets on the right type of volume licensing agreement.
There are thousands of Microsoft customers around the world, and every situation is completely unique. We don’t see customers opting out — quite the contrary in fact, as our earnings announcement shows.
PressPass: What feedback is Microsoft getting about Software Assurance and other volume licensing programs?
Matz: We know from our research that Software Assurance customers who deploy at least one benefit are more satisfied with their relationship with Microsoft. We attribute this to the type of benefits available for a customer’s unique set of needs and the significant investments Microsoft made recently to further add value to the family of benefits. For example, more than 39,000 customers are eligible for training vouchers, which is the number-one activated Software Assurance benefit. In general, customers with Software Assurance are consuming their benefits at a greater rate than they ever have.
Customers expect us to deliver innovative and high-quality products that are easy to use and enable them be successful. We are applying that feedback to our Software Assurance benefits and extending the functionality of their software investments throughout their lifecycle with a package of robust benefits and subscription services.
Over the past two years, Software Assurance has continued to evolve to better meet customers’ maintenance needs that help increase IT productivity within an organization. As one of those offerings, the Microsoft Desktop Optimization Pack has been the fastest sold new product from Microsoft ever in Volume Licensing, and reached 2 million licenses in the first six months of introduction. In fact, most of our agreement renewals are from customers who already have upgrade rights to Windows Vista, so customers want more than just the rights to an upgrade with their Software Assurance agreement. Furthermore, demand for Windows Vista Enterprise has made Windows Vista the fastest growing business in Enterprise Agreements this past year.
PressPass: How are you helping customers quantify new and existing benefits and what it means for their organization?
Matz: Again, we encourage customers to talk with their reseller partner to evaluate the Software Assurance ROI for their organization. All companies move at their own pace in rolling out new technology, but Microsoft has worked hard to make sure businesses have everything they need to make the move when they are ready through Software Assurance. We started the dialogue with customers early, assessed their needs and are delivering the benefits they need to deploy new technology sooner.
We urge all customers to do a business analysis to determine if Software Assurance is right for their business needs and have several resources in place to help them do this analysis including the Microsoft Product Licensing Advisor, which helps customers quantify their Software Assurance benefits. We also have a network of partners that are familiar with our licensing programs.
We’ve also developed — in partnership with Forrester Research — a Software Assurance ROI tool that can greatly help with this evaluation. This ROI tool has been fully updated to take these new benefits into consideration when calculating an organization’s ROI. For our part, we continue to talk with customers and evaluate what technologies they are looking for and are taking the necessary steps to enhance Software Assurance and get the right solutions in our customers’ hands, through our partners, throughout the product lifecycle.
Customers have to make a decision about whether or not Software Assurance is right for their business. However, they also need to be ready to deploy and use multiple benefits over the three years to realize a return on their investment. As organizations grow they will move from a standard to a more dynamic IT environment. We strongly believe that those customers that truly want to optimize their infrastructure can do so through Software Assurance.