News

Bing Drags Down Microsoft's Q1 Earnings

• By Kurt Mackie
• October 20, 2011

The results of Microsoft's fiscal 2012 first quarter were upbeat, with one exception: its Online Services Division.

Microsoft reported revenue of $17.4 billion for the quarter, which ended on Sept. 30. That marks a 7 percent increase from last year's first-quarter result. At $5.7 billion, net revenue was also up from the year-ago period, this time by 6 percent.

Microsoft reported $0.68 per share in the quarter, meeting financial analyst's expectations on earnings per share.

The Microsoft Business Division produced the most revenue for the quarter, at $5.6 billion, up 8 percent over last year's Q1 result. The division derives most of its revenue (90 percent) from Office, SharePoint, Exchange and Lync, with additional revenue from Microsoft Dynamics products, according to Microsoft's Form 10-Q. For this quarter, Microsoft credited the 8 percent division revenue increase to volume licensing, Office licensing and Dynamics revenue. Dynamics revenue increased 17 percent over last year's quarter. Lync, SharePoint and Exchange grew double digits during the quarter, according to Bill Koefoed, general manager of investment relations, during Microsoft's audio presentation.

The next most profitable division was the Windows and Windows Live Division. It delivered $4.9 billion for the quarter, up 2 percent over the previous year's quarter. Microsoft claims it has sold more than 450 million licenses of Windows 7 since its launch in Oct. 2009. About three-quarters of the division's revenue derive from Windows purchases by original equipment manufacturers, according to Form 10-Q, with the remainder attributed to retail sales. Microsoft's estimate is that PC sales to businesses increased about 5 percent, with consumer PC sales staying flat due to declining netbook sales. Microsoft is seeing PC sales growth in "emerging markets," but selling prices there are lower.

Server and Tools delivered $4.2 billion in revenue for the quarter, up 10 percent over last year's Q1 result. Product revenue was driven by sales of "SQL Server, Windows Server, Enterprise CAL Suites, and System Center," according to Form 10-Q. Microsoft's Enterprise Services, which delivers product support services to organizations, showed a revenue growth of 17 percent for the quarter. SQL Server Premium licensing revenue grew 20 percent during this quarter, according to Koefoed.

The Online Services Division produced $625 million in revenue for the quarter, up 19 percent year over year. However, it was beset by an operating loss of $494 million, largely attributed to Bing and Microsoft's efforts to catch up with market leader Google. Microsoft has lost about $5.5 billion on Bing since it launched in June 2009, according to a CNNMoney story. Microsoft's 10-Q cited a Bing U.S. market share of about 15 percent for this quarter, but with Yahoo portal support added, Bing U.S. market share for the quarter grew to about 27 percent. Microsoft is still working on improving revenue per search for Yahoo as generated by Microsoft's AdCenter platform. Peter Klein, Microsoft chief financial officer, said that AdCenter performance was "below expectations."

Microsoft's Entertainment and Devices Division generated almost $2 billion in revenue for the quarter, up 9 percent over last year's 1Q result. Xbox 360 console shipments (2.3 million) were down compared with last year's first quarter (2.8 million), but Xbox Live revenue increased.

Microsoft didn't break out a revenue figure for Windows Phone 7 in its published reports. The product is about one year old now as Microsoft launched Windows Phone 7 in October 2010. In the second-quarter of this calendar year, Windows Phone 7 had a 1.6 percent market share, way behind leader Google Android at 43.4 percent market share, according to Gartner stats.

The Skype voice-over-IP acquisition was closed last week and Klein said that Microsoft is starting integration with Microsoft's products, including Lync, Windows Live Messenger, Windows Phone and the Xbox gaming platform. Skype represents access to about 170 million VoIP users for Microsoft.