News

Microsoft Rides Strong Office, Xbox Kinect Sales To Beat 3Q Estimates

• By Kurt Mackie
• April 29, 2011

Led by gains from its Office, Xbox and Kinect products, Microsoft has recorded $16.4 billion in earnings in its fiscal third-quarter, the company reported on Thursday.

At $5.2 billion, net income for the quarter ended Mar. 31 surpassed the prior 3Q revenue result by 31%. Meanwhile, Microsoft's per-share earnings, at $0.61, beat expectations of $0.58 per share. According to Microsoft, that result was "the sixth consecutive quarter of double-digit" earnings-per-share growth. Likewise, Bill Koefoed, Microsoft's general manager of investor relations, said that the 3Q revenue result was Microsoft's fourth consecutive quarter of double-digit growth.

The Microsoft Business Division brought in the most revenue ($5.2 billion), followed by the Windows & Windows Live Division ($4.4 billion), Server and Tools Division ($4.1 billion), Entertainment and Devices Division ($1.9 billion), and Online Services Division ($648 million). However, the Online Services Division's revenue was offset by an operating income loss of $726 million.

Business Division revenue grew 13% during the quarter, according to Koefoed. The multiyear licensing portion grew 5%. Office 2010 deployment is five times faster than Office 2007 deployment, he said. Lync use grew 30% in the quarter, he added. Peter Klein, Microsoft's chief financial officer, noted that while Office 2010 revenues are expected to increase, overall Business Division revenues will begin to slow, but he didn't explain why. The Dynamics business grew 10% during the quarter, according to Koefoed. The Business Division also includes Microsoft Exchange, but no figures were disclosed during the earnings call.

Microsoft had noted earlier this month that Windows 7 is the company's fastest selling operating system, reaching more than 350 million licenses sold since its launch. Nonetheless, Microsoft's Windows Division revenue was down 4% in the third quarter, largely attributed to a decline in consumer spending. Koefoed said that an estimated 75% of the Windows install base is still running older Windows operating systems.

On the business side, PC growth was 9% for the quarter, according to Koefoed, adding that enterprise use of Windows 7 had more than doubled in the last six months. Klein said that Microsoft expects the ongoing business PC refresh cycle to extend through 2012.

Emerging markets now account for nearly half of all PC shipments, Koefoed said. The netbook market experienced a 40% decline on an overall consumer PC spending decrease of 8%. There was an overall 1% to 3% decline in the PC market during this fiscal third quarter, according to Microsoft.

A financial analyst asked during Microsoft's earnings call about how Microsoft's picture of the PC market squared with the one described by Intel. Klein cited the decrease in netbook sales, which he said Intel had not included. Microsoft dominates the OS markets as measured by revenue share, according to analysis by Gartner.

In the Server and Tools Division, Microsoft's System Center line of management products showed its tenth consecutive double-digit quarterly revenue growth, according to Koefoed. SQL Server showed its fourth consecutive double-digit quarterly revenue growth, he added.

The star of the Entertainment and Devices Division was Xbox products. Koefoed cited 2.4 million Xbox Kinect sensor devices sold in the fiscal third quarter. Xbox 360 console sales for the quarter were 2.7 million units. No sales figures were given for Windows Phone, but the recent deal with Nokia was highlighted.

The Online Services Division, which includes Bing search and various hosted applications, is still the ugly fiscal stepchild for Microsoft. On the search-advertising side, there was a 17% growth in online ad revenue for the quarter, but there still was an overall loss in the division. More than 50% of the companies that use Microsoft's online services are small-business customers, Microsoft revealed.

The revenue expectations resulting from Microsoft integration deal with Yahoo on search technology, announced in July 2009, have not proceeded apace. Koefoed said that the service costs associated with the Yahoo deal, which so far center on the U.S. and Canadian markets, have gone up. The original estimate was about $100 million to $200 million for turnaround costs in the first year of the deal, but Koefoed didn't describe the current costs. Microsoft plans to limit the expansion of its Bing integration for now, until it has finished its North American market testing.

Microsoft's 3Q 2011 earnings reports and recorded announcement can be accessed at the Microsoft investor relations page here.