Microsoft posts strong quarterly results, sales

Software giant offset slowing PC sales with big gains in its Office and Xbox product lines, reporting net income of $5.23 billion and a 13 percent sales gain.

Jay Greene Former Staff Writer
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).
Jay Greene
4 min read

Microsoft reported strong third-quarter sales and earnings, as the software giant weathered slowing PC sales with strong performances from its Office and Xbox businesses.

Net income in the company's fiscal third quarter climbed 31 percent from the year-ago period to $5.23 billion on sales of $16.43 billion, a 13 percent gain. Earnings per share climbed 36 percent to 61 cents, a figure that includes a 5 cent a share benefit from a settlement with Internal Revenue Service over tax audits from 2004 to 2006.

"I'm pleased with our healthy financial results for the quarter," Microsoft Chief Financial Officer Peter Klein said on a conference call with analysts, investors, and journalists regarding the results.

Investors were less pleased, though. Microsoft released its results after the stock market closed, but in after-hours trading, its shares fell 1.4 percent to $26.34. And that comes even as Microsoft bested average analyst projections of revenue of $16.2 billion and profits of 56 cents a share.

One reason: the dip in sales of Windows, one of the cornerstones of Microsoft's business. That revenue line took on greater significance after industry analyst IDC reported two weeks ago that global PC shipments declined 3.2 percent from January to March, compared with the year-ago period. Despite chipmaker Intel posting a blowout quarter last week, Microsoft's Windows business suffered.

Though Microsoft says Windows is the fastest-selling operating system in history with 350 million licenses sold, revenue for the flagship business fell 4 percent in the quarter to $4.45 billion. Operating income in the division slid 10 percent to $2.76 billion.

Microsoft believes that global PC sales slide between 1 percent and 3 percent in the quarter. Consumer PC sales fell 8 percent, including a 40 percent drop in Netbook sales. But business PC sales climbed 9 percent.

Klein cited the "breadth and depth" of Microsoft's product portfolio that allowed the company to overcome the slumping PC market. The biggest boost came from the Microsoft Business Division, comprised largely of the Office suite of productivity applications. That business, which generates more revenue than the Windows division, saw revenue grow 21 percent to $5.25 billion, fueled by sales of Office 2010, released a year ago. Operating income jumped 25 percent in the division to $3.17 billion.

Microsoft also got a big bounce from the Entertainment & Devices Division, where sales grew 60 percent to $1.94 billion, and operating income climbed 50 percent to $225 million. Microsoft's motion-sensing game controller, Kinect for Xbox 360, drove much of those sales. Launched before Christmas, the device became the fastest-selling consumer electronics device in history. The company also said it sold 2.7 million Xbox 360 consoles in the quarter, a 79 percent increase from the year-ago period.

The company's Server & Tools Division also continues to be a potent financial engine. Revenue in that unit grew 11 percent to $4.1 billion while operating income grew 12 percent to $1.42 billion. That division was buoyed by business adoption of Windows Server, SQL Server and System Center.

Microsoft's Online Services Division, the home for its Bing search engine and other Web properties, continues to hemorrhage money, as losses grew 2 percent to $726 million. Last week, Yahoo Chief Executive Carol Bartz blamed Microsoft's adCenter technology--the system for buying and delivering online ads--for failing to generate revenue the company expected from its alliance with Microsoft.

Klein acknowledged the problem, saying that revenue per search from adCenter is lower than Microsoft expected too. The companies are delaying the roll out of the service in international markets until they sort through the problem.

"When we feel like it's straightened out, we'll move onto other markets," Klein said.

Sales in the online division grew 15 percent to $648 million.

The company noted that its operating expenses for the fiscal year that begins in July will climb to between $28.08 billion and $28.6 billion. That's a 3 percent to 5 percent jump from previous guidance, presumably reflecting the recently announced compensation plan for employees, which pays more cash and less stock.

Microsoft bought back $827 million in stock and declared $1.3 billion in dividends during the quarter. And even with that payout, the company is sitting on $50.15 billion in cash.

Looking toward the fourth quarter of the fiscal year, Klein expects the Windows unit to grow inline with expectations for the PC market, which IDC forecasts to be in the single digits. The Business division, which saw such strong growth in the quarter, should post mid- to high-single digit growth in the current quarter, Klein said. The Server & Tools Division should record low double-digit growth in the fiscal fourth quarter, Klein said.

As for the smaller business units, Klein noted that advertising for Microsoft's Online business sales should be inline with the overall market, but gave nothing more specific for the division. The Entertainment & Devices division should continue its rapid growth with sales jumping 25 percent in the current quarter.

Microsoft also noted that it will shift from the tradition of holding its annual financial analysts meeting in Redmond, Wash., shortly after releasing fourth-quarter results. Instead, Microsoft will hold the meeting, when top executives meet with analysts and investors, on September 14 in Anaheim, Calif., during its Professional Developers Conference. Klein didn't explain the rationale for the move, but PDC's are benchmark moments for Microsoft, where the company lays out its vision for developers. Microsoft will likely unveil details of Windows 8 at the conference.