Microsoft financials buoyed by gaming, office software

The company reports record second-quarter revenue, though year-on-year quarterly growth was more moderate

Microsoft reports its second quarter fiscal 2011 earnings

Microsoft tallied US$19.95 billion in revenue for the quarter ending Dec. 31, a record second-quarter high for the company, it said Thursday.

However, revenue growth compared to the same quarter a year ago was moderate, either 5 percent or 15 percent, depending on how the numbers from a year ago are counted.

Microsoft's most glorious failures

Microsoft had added on $1.71 billion in deferred revenue reflecting the pre-order sales of Windows 7 made available in October 2009 in its second-quarter results last year. When this deferred revenue is factored in, second quarter growth rates for revenue is 5 percent. Without this figure factored in, the growth rate was 15 percent.

The company also rang up $6.63 billion in net income for its second quarter of fiscal 2011. Diluted earnings per share were $0.77 per share, another second-quarter record high.

The company's gaming and business sales led the growth, according to the company.

Revenue from Microsoft's Entertainment and Devices Division, boosted by the success of the Kinect sensor and associated Xbox 360 consoles, grew by 55 percent from a year ago. The company noted that 8 million units of Kinect were sold within 60 days of its launch.

Revenue from the Microsoft Business Division revenue grew 24 percent, fueled by the steady demand of Office 2010, released last June. "Office had a huge quarter, exceeding everyone's expectations" said Kevin Turner, Microsoft chief operating officer, in a statement.

Microsoft also announced that has now sold over 300 million Windows 7 and that the Internet Explorer 9 beta has been downloaded over 20 million times.

In this quarter, which ended December 31, bought back $5 billion in stock and declared $1.3 billion in dividends.

Overall, Microsoft slipped slightly in profits, to $6.63 billion this quarter, down from $6.66 billion a year ago. 

"The big surprise is how well the business division did," said Forrester analyst Andrew Bartels, noting that, in addition to Microsoft Office, Microsoft Dynamics and SharePoint also experienced strong growth in sales. 

Strong sales indicate that the market for enterprise software has rebounded after the recessionary doldrums of the past few years. Not only does this bode well for the economy, but this is also good news for Microsoft, which derives most of its revenue from enterprise software sales, Bartels said. 

Microsoft's quarter also harbored some weaknesses as well, Bartels noted. For instance, sales growth of Windows 7 has largely stagnated. "The Windows PC market is slowing quite a bit. It's hard to say what is going on there, but it is certainly possible that the iPad is hurting PC sales," he said. 

In the Microsoft conference call with analysts to discuss the financial results, Chief Financial Officer Peter Klein admitted during the question-and-answer period that sales of tablets, such as the Apple iPad and the Samsung Galaxy, may have slowed Windows sales overall. 

"I think over the course of this year in the consumer space, [netbook] buying is being replaced by ultra-portables and tablets. Largely these are secondary devices and not primary devices, and this has caused a little bit of a drag on the consumer side," he said. 

Bartels also noted that the server and tools division showed a 10 percent growth in sales, 2 percent lower than Forrester expected. In the first week of January, Microsoft announced that Bob Muglia, who headed that division, would be stepping down this year. 

While the company did not disclose financial details about its products in the mobile and cloud markets, it expressed enthusiasm for future growth in these areas. 

During the conference call, Klein mentioned that the company has sold 2 million licenses for Windows Phone 7 and that the platform had already attracted 24,000 developers. And while the company did not break out numbers for its Azure cloud computing services, Klein said that interest is strong among potential enterprise customers. 

"It will happen, and while the exact speed of the ramp-up is uncertain, once it will start to accelerate, it will accelerate pretty fast," he said of Azure growth.

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Copyright © 2011 IDG Communications, Inc.

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