Microsoft results top expectations, led by Office, Xbox

The software giant posts solid fourth-quarter results on continued strength in its Office, server software, and Xbox video game business.

Microsoft bested analyst revenue and earnings expectations today with fourth-quarter results buoyed by continued solid sales from its Office franchise and its server software business, as well as strong gains from its booming Xbox operations.

For the fiscal fourth quarter that ended June 30, Microsoft posted operating income of $6.17 billion, a 4 percent gain from the year-ago period, on sales of $17.37 billion, an 8 percent jump. Earnings per share climbed 35 percent to 69 cents.

For the year, Microsoft posted operating income of $27.16 billion, up 13 percent, on sales of $69.94 billion, a 12 percent gain from fiscal 2010. Earnings per share grew 28 percent to $2.69.

"Throughout fiscal 2011, we delivered to market a strong lineup of products and services, which translated into double-digit revenue growth and operating margin expansion," Microsoft Chief Financial Officer Peter Klein said in a statement. "Our platform and cloud investments position us for long-term growth."

Wall Street analysts had expected Microsoft to earn 58 cents per share, up from 51 cents a year ago, on revenue of $17.23 billion, up 7 percent.

Despite the solid results, Microsoft's Windows franchise continues to slide. Revenue in Microsoft's Windows and Windows Live division fell about 1 percent to $4.7 billion. Operating income for the group dropped 4 percent to $2.9 billion. The culprit: consumer PC sales, which fell 2 percent in the quarter, according to Microsoft. That dip comes amid a solid recovery in business spending, which helped push business PC sales up 8 percent.

Heading into results, analysts cast a wary eye on Windows revenue in the wake of recent projections from research firms IDC and Gartner that PC shipments rose just 2.3 percent and 2.6 percent, respectively, in the quarter.

The Windows slide, though, was more than offset by gains in the company's other franchise business. Microsoft's Business Division--home of its Office productivity suite--continues to post sizable gains despite the age of its core product. The group generated $5.8 billion in sales, a 7 percent jump from the fiscal fourth quarter of 2010. That led to operating income for the group of $3.6 billion, a 12 percent bump.

Microsoft's Server and Tools division remains another consistent growth engine. Revenue at the unit grew 12 percent in the quarter to $4.6 billion, marking the fifth consecutive quarter of double-digit growth. The division's operating income hit $1.8 billion, a 14 percent jump.

And the Entertainment and Devices division, home to the company's Xbox business, saw revenue soar 30 percent in the quarter to $1.5 billion on the continued strength of the console, which has outsold rivals for 12 of the past 13 months. In the quarter, more than 1.7 Xbox consoles sold, and Microsoft said it now has more than 35 million Xbox Live customers.

That helped the Entertainment division turn a $32 million operating profit in the quarter, compared with a $172 million loss in the fiscal fourth quarter of 2010.

"We've got great momentum in the marketplace," Klein said during a conference call with analysts after the results were released. "You see the strategy really coming together in that business."

Microsoft's Online Services division, which includes the Bing search engine, saw modest growth off a relatively tiny base but continues to hemorrhage cash. Operating losses at the unit expanded 6 percent to $728 million on revenue of $662 million, a 17 percent jump.

During the conference call, Klein also addressed the challenges that Microsoft is having with its adCenter technology, the system for buying and delivering online ads that Yahoo is now using. Yahoo, which reported lackluster results on Tuesday, noted that it continues to see lower-than-expected revenue per search from the Microsoft technology. Like Yahoo chief executive Carol Bartz, Klein said Microsoft is working on the problem and expects to have it resolved by January.

"We still face monetization challenges and continue to work closely with Yahoo," Klein said. "We'll have this turned around by the end of the year and we're totally committed to doing this."

Microsoft continues to generate huge sums of cash from its core businesses. At the end of the quarter, Microsoft was sitting on $52.7 billion, up 43 percent from June 30, 2010.

That cash allows the company to continue returning money, in various forms, to shareholders. In the fiscal year, Microsoft spent $16.9 billion on dividends and stock buybacks.

Wall Street seemed largely unimpressed by the results. In after-hours trading, Microsoft shares have barely budged, falling 9 cents to $27.

Microsoft

Updated at 3:40 p.m. PT with details and analysis.

About the author

Jay Greene, a CNET senior writer, works from Seattle and focuses on investigations and analysis. He's a former Seattle bureau chief for BusinessWeek and author of the book "Design Is How It Works: How the Smartest Companies Turn Products into Icons" (Penguin/Portfolio).

 

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