News

Microsoft's 2Q 2011 Earnings Buoyed by Xbox and Office

• By Kurt Mackie
• January 27, 2011

Microsoft mostly beat financial analyst expectations in its fiscal second quarter, reporting overall earnings of $19.9 billion.

Net income for the quarter, which ended on Dec. 31, 2010, was $6.6 billion. Microsoft delivered $0.77 per share during the quarter to its shareholders. Revenue was up across all of Microsoft's operational divisions, except for the Windows and Windows Live Division, but Microsoft had an explanation for that result.

The Windows and Windows Live Division brought in $5.0 billion in fiscal 2Q 2011 compared with $7.2 billion in fiscal 2Q 2010. However, Microsoft's 2Q 2010 financial results for the Windows Division were pushed up due to advance sales associated with a Windows 7 launch promotional campaign. So, minus those sales, Microsoft claimed that Windows revenue actually grew 15%, quarter over quarter.

Peter Klein, Microsoft's chief financial officer, predicted during an earnings report conference call today that the PC refresh cycle would continue onward into Microsoft's third fiscal quarter. In response to a question from a financial analyst, Klein said that PC sales are growing faster in emerging markets than in mature markets -- at about two times the rate. Pricing for PCs in emerging markets is about half that of mature markets, he added. He said that netbooks have hit their peak and acknowledged that tablets may be cutting into consumer market sales somewhat. However, he contended that tablets are being purchased as "secondary devices."

Bill Koefoed, general manager of investor relations at Microsoft, noted that business PC sales are growing faster than consumer PC sales. Notebook sales remain "healthy," he added. More than 300 million Windows 7 licenses have been sold to date, Koefoed said, making it the fastest selling operating system in Microsoft's history. Microsoft first launched Windows 7 in October of 2009.

Microsoft's Online Services Division continued to burn cash. Microsoft reported an operating income loss of $543 million for the Online Services Division in the fiscal second quarter, but the loss was offset by $691 million in revenue. Microsoft completed the integration of its Bing search engine on Yahoo sites in the U.S. and Canadian markets during the quarter. The integration is being expanded into Mexico, Brazil and Australia.

The star performers for the quarter were Kinect for Xbox 360 and Microsoft Office, according to Klein. Kinect is the natural user interface for the Xbox 360 gaming console that tracks user movements.

Klein rolled out some Xbox stats. He said that Microsoft sold "8 million units of Kinect sensors" in 60 days. The Entertainment and Devices Division, which is responsible for the Xbox gaming consoles, had a "55 percent growth in revenue," bringing in $3.7 billion in revenue for the quarter. Klein described Xbox as "the fastest selling devices in computer history." Koefoed added that Microsoft has sold 6.3 million Xbox consoles this quarter and Xbox Live now has 30 million members.

New Windows Phone 7 sales details were not disclosed during the earnings conference call, although Koefoed said that more than two million Windows Phone 7 licenses have been purchased by handset makers. Microsoft announced the launch of Windows Phone 7 on hardware devices in mid-October 2010. The new mobile operating system was rolled out at that time to nine devices, 60 operators and 30 countries.

Koefoed described Microsoft Office 2010 as the fastest selling consumer version of Office in Microsoft's history. Microsoft's Business Division, responsible for Office, Dynamics, Exchange, Lync and SharePoint, brought in $6 billion for the quarter.

The Server and Tools Division -- responsible for Windows Server, SQL Server, Windows Azure, Windows Embedded and Enterprise Services -- brought in $4.4 billion for the quarter. Koefoed cited double-digit growth for SQL Server revenue in fiscal 2Q 2011.

Microsoft's 2Q 2011 earnings report and an audio recording of the earnings conference call can be accessed at the Microsoft investor relations Web page here.