Microsoft shows off strong Q2 earnings

Microsoft posted the largest quarterly revenue numbers in its history on Thursday when it released its earnings for its fiscal 2006 second quarter.

The company’s $11.84 billion in revenue was a 9% increase over the same quarter in fiscal 2005. Microsoft attributed the gains to strength in its Server and Tools business, as well as, sales of its Xbox 360, which shipped 1.5 million units before Dec. 31 after being launched last year. Microsoft also cited strong demand for personal computers in its earnings report, especially laptops loaded with its Windows XP operating system.

Microsoft’s net income for the quarter was $3.65 billion, a growth of 5% over the same quarter last year. Operating income for the quarter was $4.66 billion, which was a 2% decline over the prior year and was attributed to the expense of marketing, product development and expense associated with product launches including SQL Server 2005 and Visual Studio 2005.

“Overall, we feel they did OK and the stock may breath a sigh of relief,” Goldman Sachs wrote in a research note after the earnings were announced. The stock priced closed at $26.50 Thursday on the Nasdaq Stock Market.

Server and Tools revenue was $2.9 billion a 14% increase over the prior year with SQL Server showing 20% year-over-year growth. It was the 14th consecutive quarter that the Server and Tool business posted double digit revenue gains.

“We are forecasting continued corporate demand for our server products,” said Chris Liddell, CFO of Microsoft.

Microsoft’s information worker business, which includes Office, showed revenue growth of 5%. The company expects continued growth, especially with a new version of Office in the wings, which it predicts will peak interest in its Software Assurance maintenance program.

“As we moves closer to the launch on Office 12 we expect corporate customers to increasingly prefer annuity licensing programs when they evaluate purchases,” says Liddell. Office 12 is expected to ship late this year.

Microsoft said it continued to see growth in volume licensing contracts with the strongest impact coming from Enterprise Agreements, which matched historical renewal rates of 66% to 75%.

The unearned revenue balance, an indicator how well Microsoft’s annuity pricing program is catching on with volume licensing customers, had a revenue balance of $8.8 billion in the quarter, up 11% over the prior year. Microsoft said the change was a reflection of the small number of contracts that were up for renewal in the quarter. The bulk of the contract renewals are expected to come in the later half of the year and Microsoft hopes products such as Office 12 and Exchange 12 will draw customers back to those contracts.