Microsoft's Mixed Earnings: Record Revenue, Drop In Profit

Microsoft's enterprise business achieved strong sales, but questions remain after Windows 8 posted a so-so launch.
Microsoft on Thursday reported revenues of $21.5 billion for its second fiscal quarter, which ended December 31. The sum was a company record, representing an uptick of almost 3% over the $20.9 billion generated in sales over the same period a year ago. Even so, the performance, which was consistent with analyst estimates, was something of a mixed bag, with profit slipping to $6.38 billion, or 76 cents per share, down about 4% from $6.62 billion, or 78 cents per share.

Windows 8, Microsoft's most ballyhooed release of the year, exemplified the hit-and-miss nature of the quarter. The Windows division's revenue jumped 24% year-over-year, amassing $5.9 billion in sales. This figure included revenue generated before the product became officially available, however, and would have represented only an 11% increase if the deferred sum had been omitted.

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Accounting practices aside, the revenue wasn't enough to revitalize the slumping global PC market. Microsoft, along with partners such as Intel and Dell, spent the fall predicting that Windows 8's interface would reignite demand for new, touch-enabled hardware. This intention has yet to manifest into sales, however. While more than 60 million Windows 8 licenses have been sold, roughly on par with the Windows 7 launch, holiday PC sales were nonetheless uninspiring.

Earlier this month, IDC research director David Daoud told InformationWeek that Windows 8's failure to energize the industry rested largely with OEMs, claiming that PC makers had not produced enough compelling hardware and that they'd emphasized touch-friendliness to the exclusion of the OS's other improvements, such as security. Reports have since surfaced that Microsoft blames manufacturers for the slow holiday sales.

It's easy to overblow tensions among business partners, but internal sniping is nonetheless noteworthy given that some have interpreted the Surface tablet as Microsoft's declaration that OEMs aren't getting the job done. Microsoft didn't disclose sales figures for the heavily hyped device during its earnings call, but it's estimated that around 1 million of the tablets were sold.

This volume pales in comparison to the 22.9 million iPads Apple sold during the same period, but Microsoft CFO Peter Klein has suggested that Surface's limited distribution channel constrained its sales potential. Surface will soon become available in 14 more countries, and the company has high hopes for its Surface Pro model, which is expected February 9 and runs the full version of Windows 8. The tablet line's initial performance is thus unlikely to be the final word on Microsoft's foray into hardware.

Microsoft's Entertainment & Devices division was another mixed bag. The group, whose responsibilities include the Xbox and Windows Phone 8 platforms, posted revenues of $3.8 billion, an 11% decline. Still, that number included four times as many Windows Phone sales as the same period last year, an indication that Windows Phone 8, though unlikely to rival iOS or Android in the immediate term, is gaining traction.

Among other groups experiencing losses, the Office division fell 10%. At least some of that setback can be attributed to customers who have delayed purchases until Office 365 becomes generally available. Online services were another hodgepodge of positives and negatives. The division, which includes projects such as Bing, grew 11% but remained unprofitable overall.

As for the bright spots, Microsoft's enterprise-oriented products were a particular highlight. Thanks to strong growth in SQL Server and System Center, the Servers & Tools division reported a 9% increase in revenue, to $5.2 billion.

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