Microsoft posts record-breaking Q2, thanks to consumers, Windows 7

But enterprises aren't buying it: revenues from businesses decreased $231 million or 6%

Microsoft today reported a record-breaking fourth quarter, which it laid at the feet of consumers adopting Windows 7. Its units that service the enterprise didn't fair as well. The company reported revenue of $19.02 billion for its fiscal Q2 quarter which ended Dec. 31, a 14% increase over the year-ago Q2. Diluted earnings per share were 0.74. This beat analyst expectations of revenues of $17.8 billion and $0.59 per share.

Steve Ballmer
Microsoft had such a stunning quarter in part because it recognized $1.71 billion of deferred revenue, an impact of $0.14 of diluted earnings per share, relating to the Windows 7 Upgrade Option Program and pre-sales of Windows 7 to OEMs and retailers before general availability. Microsoft said it sold more than 60 million licenses for Windows 7 by the end of December, mostly to consumers. But even adjusting for that, second-quarter revenue totaled $17.31 billion, and diluted earnings per share totaled $0.60 per share.

Not bad.

When looking at enterprise demand, Microsoft is still in a rough patch. Revenue for Microsoft Business Division, which includes Microsoft's Office and Microsoft Dynamics, however, fell to $4.7 billion from $4.9 billion. Profit for the business division fell to $3.01 billion from $3.02 billion, reports the Wall Street Journal.

Microsoft explains in its SEC documents:

"Business revenue decreased $231 million or 6%, primarily reflecting a decline in licensing the 2007 Microsoft Office system to transactional business customers, offset in part by a 1% increase in Microsoft Dynamics revenue. Consumer revenue increased $95 million or 12%, primarily as a result of growth in the PC market."

The Microsoft Server and Tools division, experienced a 2% increase in revenue over the year-ago period and is up by only 1% for the first half of the fiscal year, compared to the year-ago period. This unit sells Windows Server, Microsoft SQL Server, developer tools, and training and certification. Those gains came from increase sales of Windows Server, Enterprise CAL Suites and System Center revenue. Fewer businesses hired Microsoft's consulting services declined, dragging the whole unit down.

One thing nice to see is that Microsoft isn't spending so wildly on research and development as it has traditionally. R&D expenses actually decreased $88 million or 16% which Microsoft says is "primarily due to decreased third-party development and programming costs." I read that to mean paying for fewer contract workers.

The Entertainment and Devices Division posted a nice gain in profit, tripling it to $375M compared to $130M a year ago. But that unit's revenues declined 11% from about $3.3 billion a year ago, to $2.9 billion for this quarter. Heads did roll. That unit reorganized earlier this month, with the vice president responsible for Zune and the service provider platform Mediaroom IPTV, Enrique Rodriguez, making an exodus in the process. The unit's top guy, Robbie Bach, is the highest paid Microsoft executive according to SEC documents Microsoft filed in October. Bach earned $6.24 million in 2009, compared to CEO Steve Ballmer's $1.27 million.

To no one's surprise -- the Online Services Division posted yet another big fat loss of $478M for the quarter. It has racked up $972M in losses so far for the fiscal year, a bigger money pit than it was the year prior. At the same year-ago period, it had lost $704M. Microsoft explained that it pretty much saw losses in one or another on everything connected to this division including access fees and advertising.. Here are Microsoft's exact words.

"OSD revenue decreased as a result of lower Access and online advertising revenue. Access revenue decreased $14 million or 29%, reflecting continued migration of subscribers to broadband or other competitively-priced service providers. Online advertising revenue decreased $11 million or 2%, to $516 million, reflecting a decrease in display advertising and advertiser and publisher tools revenue, offset in part by an increase in search revenue. Foreign currency exchange rates accounted for a $13 million or two percentage point increase in revenue. ... Cost of revenue increased $171 million or 50%, primarily driven by higher online traffic acquisition costs."

The upshot is for enterprise users: Now is a good time to negotiate a deal on Microsoft Office, not as good for Windows 7.

(In millions)   

Three Months Ended

December 31,

   

Six Months Ended

December 31,

 


         
     2009     2008     2009     2008  
         

Revenue

                                

Windows & Windows Live Division

   $ 5,073      $ 3,930      $ 9,058      $ 8,041   

Server and Tools

     3,848        3,775        7,285        7,214   

Online Services Division

     581        595        1,067        1,108   

Microsoft Business Division

     4,749        4,893        9,155        9,810   

Entertainment and Devices Division

     2,938        3,256        4,829        5,149   

Unallocated and other

     1,833        180        548        368   


 


 


 


Consolidated

   $   19,022      $   16,629      $   31,942      $   31,690   
    


 


 


 


Operating income (loss)

                                

Windows & Windows Live Division

   $ 3,516      $ 2,550      $ 6,324      $ 5,409   

Server and Tools

     1,370        1,336        2,606        2,336   

Online Services Division

     (478     (378     (972     (704

Microsoft Business Division

     2,914        2,991        5,747        6,096   

Entertainment and Devices Division

     361        103        654        237   

Reconciling amounts

     830        (663     (1,364     (1,436


 


 


 


Consolidated

   $ 8,513      $ 5,939      $ 12,995      $ 11,938   
    

Source: Microsoft's SEC 10Q filing.

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