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Microsoft less profitable than Apple despite gains in Office, Kinect

MIcrosoft reports $16.43 billion in revenue, $5.23 billion in profit

Led by strong sales of Microsoft Office and Kinect for Xbox 360, Microsoft raked in $16.43 billion in revenue and $5.23 billion in profit during the quarter ending March 31, 2011. The numbers lag behind Apple, which reported higher revenue and profit, but Microsoft still exceeded financial analysts' expectations by reporting earnings per share of 61 cents.

Even though Windows 7 has sold 350 million licenses in 18 months, revenue for the Windows division dropped 4% year-over-year as PC sales slowed down. But the success of Office 2010 helped the Microsoft Business Division grow revenue 21%, and Kinect helped the Entertainment & Devices division grow 60%.

Overall, the net income of $5.23 billion was 31% higher than the previous year. Operating income was $5.71 billion, a 10% improvement over the same quarter in 2010. Total revenue was up 13%. 

Since surpassing Microsoft in market cap last year, Apple has continued to post higher revenue, and now it even has higher profit figures than Redmond. Apple's most recent results included revenue of $24.67 billion and net profit of $5.99 billion, or $6.40 per share. 

But Microsoft is still well ahead of Apple in profit margin, part of the advantage of running a business almost exclusively based on software rather than hardware.

Wall Street analysts were expecting Microsoft profits of 56 cents per share, but the company has been routinely exceeding analyst predictions by 10% or more, notes Forbes.com financial analyst Joseph Hargett.

"We delivered strong financial results despite a mixed PC environment, which demonstrates the strength and breadth of our businesses," Peter Klein, chief financial officer at Microsoft, said in the earnings release. "Consumers are purchasing Office 2010, Xbox and Kinect at tremendous rates, and businesses of all sizes are purchasing Microsoft platforms and applications."

Microsoft divides its products into five divisions: Windows & Windows Live; Server and Tools; Online Services; Microsoft Business; and Entertainment and Devices.

A year ago, Windows was the top profit generator, but that title now belongs to the Microsoft Business Division, which pulled in $3.2 billion in operating income compared to $2.8 billion for Windows.

Total revenue for the Business Division, which includes Office, Exchange, SharePoint, Lync and the new Office 365 cloud service, was $5.3 billion, meaning the bulk of that is pure profit.

The Online Services Division, which includes the Bing search engine and MSN, continues to disappoint in a big way. Microsoft boasted that revenue grew 14%, but the division still lost $726 million, slightly more than the loss in the previous year's quarter.

Microsoft said its total operating expenses in the full fiscal year ending June 30, 2011 will be $26.9 billion to $27.3 billion, and that expenses in fiscal 2012 will rise to $28 billion to $28.6 billion. That probably reflects Steve Ballmer's decision to give employees across-the-board pay hikes to retain and attract talent. 

Microsoft is hosting an earnings call in a few minutes and we'll update this post with interesting tidbits and quotes after it's done. 

UPDATES: MacDailyNews reports that Apple hadn't beaten Microsoft in profit for a full year or quarter since 1990. This is just one quarter, but if Apple sells enough iPhones, iPads and Macs, who knows? It's not like Microsoft isn't growing revenue, it just isn't growing as fast as Apple.

During the press conference, Microsoft said increased costs related to the search alliance with Yahoo and lagging revenue-per-search are keeping Online Services revenue down. Microsoft is focusing on growing both search market share compared to Google and revenue-per-search.

Microsoft talked up its phone partnership with Nokia but declined to say much about its tablet plans, and did not answer a question about when it plans another Xbox gaming console. 

Hyper-V and Office 365 are doing well and business PC sales will outpace consumer PC sales next quarter, the company said. 

When asked if business software growth is sustainable, CFO Peter Klein said: "We feel great about how enterprises are investing in IT and in particular how they are interested in our product suite."

Follow Jon Brodkin on Twitter.

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