Microsoft posts record quarter but says tablets have “cannibalized” netbooks

Enterprise customers are flocking to Windows, Office, SQL Server but PC sales are weak

Despite weak consumer demand for PCs, Microsoft posted a record first quarter revenue of $17.37 billion for the period that ended Sept. 30. This beat analysts expected sales of $17.2 billion. Revenue increased 7% percent over the year-ago period. Microsoft credited the increase to enterprise demand for Office, server and development tools.

Despite weak consumer demand for PCs, Microsoft posted record first quarter revenue of $17.37 billion for the period that ended Sept. 30. This beat analysts' reported expectations of $17.2 billion. Revenue increased 7% percent over the year-ago period. Microsoft credited the increase to enterprise demand for Office, server and development tools.

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The Microsoft Business Division reported $5.62 billion in revenue, an 8% increase from the prior year period when Microsoft launched Office 2010. Revenue from server products like Lync, SharePoint, and Exchange grew double-digits, and the Dynamics business grew 17% in the quarter. Lync revenue grew by over 25%. Plus, Office 365 has already signed as many customers as its predecessor did, Business Productivity Online Standard Suite (BPOS), said Peter Klein, chief financial officer, during the company's earning webcast.

The Server & Tools unit posted $4.25 billion in revenue, a 10% increase over the prior year period. This unit is responsible for Windows Server, Microsoft SQL Server, Windows Azure, Visual Studio, System Center, embedded platforms and enterprise services. Microsoft says the unit saw its sixth consecutive quarter of double-digit revenue growth that was driven by demand for SQL Server, Windows Server, System Center and Enterprise CAL Suites – the client licenses Microsoft requires for its server products.

Profits increased as well. Microsoft reported that operating income, net income and diluted earnings per share for the quarter were $7.20 billion, $5.74 billion, and $0.68 per share. This represents increases of 1%, 6%, and 10%, respectively, when compared with the prior year period.

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Xbox was another high spot. Xbox was the top-selling gaming console in the U.S. for the ninth consecutive month, Microsoft says. The Gears of War 3 game sold over three million copies in the first week, although this didn't compare to the success of Halo Reach, which was released in the year-ago period and earned $200 million on its first day. Microsoft also took on the Roku and Boxee consoles of the world when it announced plans to roll out TV entertainment on Xbox LIVE starting this holiday season with about 40 content providers. 

In all, Microsoft shipped 2.3 million Xbox 360 consoles in the quarter, compared to 2.8 million in the year-ago period. The Entertainment and Devices Division garnered $1.96 billion in revenue, a 9% increase. Interestingly, this unit is where income from royalties on its Android license agreements is credited, said Klein.         

There were brown spots. The tablet has all but killed netbooks, Klein said, admitting to “some cannibalization of netbooks” when reporting the results of the Windows and Windows Live Division. Revenue was $4.87 billion, a mere 2% increase over the prior period, again, hurt by soft netbook sales. Note that Apple sold 11.1 million iPads during this period – a record for the tablet. 

Analysts say that about 91.8 million PCs total were shipped in the period. Windows PC sales to enterprises grew at about 5% while sales of PCs to consumers were flat, Microsoft says. Klein believes that the company is in the “middle innings” of Windows 7 adoption in the enterprise. Windows 7 now accounts for about 50% of all Windows users, according to Statcounter. Microsoft said that Windows 7 licenses have reached 450 million since its launch.

The perennial weak spot of Microsoft's Online Services Division remained so. The unit lost $494 million which was less money than it lost in the year-ago quarter, at $558 million. Microsoft says that Bing now owns 15% of the search market and this includes the boost it got from becoming Yahoo's search engine. Speculation that Microsoft will still buy Yahoo never seems to die, but Steve Ballmer recently went on record saying Microsoft was “lucky” that the deal fell through in 2008. 

Klein offered a little guidance, too. The first quarter has been traditionally Microsoft's weakest and the company expects its next quarter, which maps to the holiday season, to be another exceptional one, he said.

Julie Bort is the editor of Network World's Microsoft Subnet and Open Source Subnet communities. She writes the Microsoft Update and Source Seeker blogs. Follow Bort on Twitter @Julie188.

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