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Microsoft sees strong Office and flat Windows in quarter

The software giant meets analyst expectations for its fiscal first quarter, seeing continued strength in its Office franchise, but only tiny growth in Windows sales.

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 met analyst expectations for fiscal first-quarter earnings today, generating solid sales from its Office and server software divisions while revenue from its flagship Windows operating system barely budged up from the year-ago period.

"We saw customer demand across the breadth of our products, resulting in record first-quarter revenue and another quarter of solid (earnings per share) growth," Peter Klein, chief financial officer at Microsoft, said in a statement. "Our product portfolio is performing well, and we've got an impressive pipeline of products and services that positions us well for future growth."

For the fiscal first quarter that ended September 30, Microsoft posted operating income of $7.2 billion, a 1 percent gain from the year-ago period, on sales of $17.37 billion, a 7 percent jump. Earnings per share climbed 10 percent to 68 cents. Analysts had been expecting Microsoft to post earnings of 68 cents a share on sales of $17.3 billion, according to Thomson Financial.

The biggest challenge for Microsoft remains sluggish PC sales. The company estimates that the PC market grew between 1 percent and 3 percent in the quarter. With slowing demand for computers comes slowing growth for Windows. For the quarter, sales in the Windows and Windows Live Division climbed 2 percent to $4.9 billion.

In its quarterly report filed with the Securities and Exchange Commission, Microsoft noted that PC sales to businesses climbed 5 percent, while sales to consumers were flat. The biggest drag: Netbook sales.

"Excluding a decline in sales of netbooks, we estimate that sales of PCs to consumers grew approximately 8%," the company wrote in its quarterly filing.

Operating income for the group fell 1 percent to $3.3 billion. That drop came as the company bumped up advertising and marketing expenses 8 percent. Research and development costs for the group increased $37 million or 9 percent as Microsoft ramped up development costs for creating Windows 8, the next version of the operating system that's expected to debut late next year.

Microsoft's other big franchise, the Office productivity suite, continued its strong run. The company saw solid gains in Office sales even though the product debuted in June 2010, creating a tough comparison for the most recent quarter. Even so, sales in the Microsoft Business Division grew 8 percent to $5.6 billion. What's more, the company's Dynamics business, which makes customer-relationship management software, grew 17 percent in the quarter. The Office group's operating income grew 6 percent to $3.7 billion

Sales from Microsoft Windows and Windows Live division for the last five quarters. Microsoft

The software giant also relied on sales from its server software products to buoy quarterly results. The Server and Tools Division continued it strong run of quarterly success, approaching the Windows unit in sales. For the fiscal first quarter, the server unit posted $4.3 billion in revenue, a 10 percent jump. Operating income for the division climbed 4 percent to $1.6 billion.

The Xbox business provided another bright spot for the company in the quarter. In the quarter, the company launched Gears of War 3, the latest edition in the popular franchise. It sold more than 3 million copies in the first week. That helped boost sales in the Entertainment and Devices Division 9 percent to $2 billion. Operating income for the group fell 9 percent to $352 million.

Microsoft's Online Services Division, the home of its Bing Web search business, continues to hemorrhage cash, even as it nibbles away at Google's massive market share lead. The division posted a $494 million operating loss, which narrowed from its $558 million operating loss in the year-earlier period. Sales at the group grew 19 percent to $625 million.

Microsoft's adCenter technology, the system for buying and delivering online ads, has struggled to generate the sort of revenue per search the company and Yahoo anticipated when they signed their search partnership in 2009. Yahoo interim Chief Executive Tim Morse acknowledged on his company's earnings call Tuesday that the challenges continue, so much so that Microsoft extended by one year the revenue guarantees to cover the shortfall that were to expire in March.

On the Microsoft earnings call this afternoon, Klein said the company's Online Services Division continues to work to fix the system.

"Our No. 1 priority is to resolve the monetization challenges of the combined ad platform," Klein said.

The company continues to generate mountains of cash. Even as it returned $2.7 billion to shareholders in the quarter, its cash hoard grew nearly $5 billion from June 30 to $57.4 billion.

Shareholders reacted to the results by pushing Microsoft's stock down less than 1 percent to $26.87 in after-hours trading.

"Overall, these results were in line with expectations and we would expect to see shares remain relatively flat on this news," Nomura analyst Rick Sherlund wrote in a research note.

Updated with details and analysis at 1:46 p.m., 2:10 p.m., and 3:38 p.m. PT.