Microsoft Earnings Hit $3.46 Billion in Q2

Microsoft reported net income of $3.46 billion on revenues of $10.82 billion for the quarter that ended Dec. 31. Company officials attributed the record revenues to 18 percent growth in the Server and Tools business and the first profitable quarter for Microsoft's Home and Entertainment business.

"Our record revenues came from across-the-board strength in both our business and consumer segments," outgoing chief financial officer John Connors said in a statement. Connors announced earlier this year that he will be leaving Microsoft to join a venture capital firm.

The $10.82 billion in revenues represents a 7 percent increase over the year-ago quarter. Net income was much higher than the $1.55 billion from the second quarter of Microsoft's fiscal 2004, but the older quarter included $2.21 billion in compensation expenses from the employee stock option transfer program.

Diluted earnings per share were $0.32, which exceeded Microsoft's stated expectations by $0.04.

Bolstering the server and tools business were a 25 percent boost in SQL Server revenues and the fastest adoption of licenses yet for a new version of Exchange since Exchange Server 2003 launched. Server and Tools revenues hit $2.5 billion with operating income at $913 million. The operating income is a $1.1 billion turnaround from the second quarter of 2004 when the segment lost $209 million on $2.1 billion in revenues.

Sales of "Halo 2" and Xbox consoles during the quarter, which included the holiday season, fueled the segment's first profitable quarter. "Our long-term approach to growing new businesses is paying off," Connors said. The Home and Entertainment segment swung from a $397 million loss in Q2 2004 to an $84 million profit in Q2 2005. Revenues rose from $1.27 billion to $1.41 billion.

In all, Connors said Microsoft's three emerging businesses combined for an almost $700-million gain in operating results compared to the year-ago quarter.

Elsewhere, the Client segment, which includes Windows XP, continued to steamroll the industry. More than $3.22 billion in revenues and $2.53 billion in earnings poured into Microsoft's coffers from the Client segment.

Information Worker, the segment that includes Office, brought more operating income, but less revenue compared to the year-ago period. Operating income rose from $1.83 billion to $2.03 billion, but revenues fell from $2.86 billion to $2.78 billion.

Looking ahead, Microsoft is telling investors that in the quarter that will end March 31 they should expect revenues of $9.7 billion to $9.8 billion, operating income of $4.1 billion to $4.2 billion and diluted earnings per share of $0.27 to $0.28.

About the Author

Scott Bekker is editor in chief of Redmond Channel Partner magazine.