Microsoft Q3: Profit up despite PC market slump; CFO out

Summary:A win on the bottom line and a tiny ding on the top line. While Microsoft touted its Business unit as the division that carried the quarter, the company stayed mum on Windows sales.

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In spite of declining  PC sales  and  cautious  chipmakers, Microsoft fared well in the third quarter.

The software giant reported third quarter revenue of $20.49 billion or 72 cents a share, missing analyst expectations on revenue by a fraction. Operating income was $7.61 billion while net income stood at $6.06 billion.

Wall Street expected Microsoft to report third quarter earnings of 68 cents a share on revenue of $20.5 billion. 

It's a bottom-line win, and a top-line loss.

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Microsoft chief executive Steve Ballmer said he was "optimistic" that all the bets the company has made on Windows devices will "position us well for the long-term." But the company couldn't escape a massive $733 million fine imposed by the European Commission for falling to maintain its antitrust commitments.

He noted in his prepared remarks that there is "there is still work to do," noting Microsoft services Azure, Xbox and Windows Live, but didn't mention Windows 8.

The company also announced that its chief financial officer, Peter Klein, will leave the company at the end of the coming fourth quarter. A new CFO will replace Klein in "the next several weeks."

Microsoft said its Windows Division posted revenue of $5.70 billion, a 23 percent increase on the same quarter a year ago.

It's surprising considering the death throes warning over PC sales at the moment. No word on Windows 8 sales yet — or Surface sales for that matter — but it with revenue up by nearly one-quarter it can't be doing too badly. At the last count in early January, Microsoft had  sold 60 million licenses .

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Image: Microsoft

The Business division reported an 8 percent jump in revenue year-over-year, amounting $6.32 billion in total. The unit includes the Office suite, which remains one of the company's greatest money makers, and its Web-based Office 365 service.

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Image: Microsoft

The Server & Tools division generated $5.04 billion in total, an 11 percent rise from the same quarter a year ago. SQL Server and System Center carried the division this quarter with revenue growing 16 percent and 22 percent respectively.

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Image: Microsoft

Meanwhile, its Online Services Division posted $832 million, up 17 percent year-over-year. An increase in revenue per search led to a spike of 22 percent in online advertising revenue.

Finally, home of the Xbox and Windows Phone, Microsoft's Entertainment and Devices division saw a 56 percent jump in revenue for the prior year period at $2.53 billion.

It comes as Nokia announced on Thursday that Lumia sales, which run the Windows Phone software, were up by one-quarter to 5.6 million shipments . Around two-thirds of all Lumia shipments were Windows Phone 8-based products, Nokia said.

It's little surprise that Microsoft's Business division and Server & Tools division — the company's two enterprise-focused units — put out another solid quarter. Evercore analysts Kirk Materne and Matthew Williams said in a note this week that they expect their strong performance to be "largely overshadowed by the challenges in the Windows business."

Materne and Williams said looking ahead that Microsoft's focus should be on "making its apps extensible to all devices," hinting at Office on iOS and Android platforms — not now expected until late 2014  — and using its "massive free cash flow to help bolster its efforts in areas such as analytics and unstructured data management."

Since the start of the calendar year, Microsoft's share price has risen by 8 percent, from $26.70 to nearly $29 a share, and continues to steadily climb. 

On today's earnings, Microsoft was up more than 2 percent in after-hours trading.

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$MSFT in after-hours trading after its Q3 earnings release. Image: Google Finance

Looking ahead, Microsoft is revising down its outlook to $30.2 billion to $30.5 billion for the fiscal full year ending June 30, partly as a result of the European Commission fine imposed earlier this year.

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Image: Microsoft

Topics: Microsoft

About

Zack Whittaker writes for ZDNet, CNET, and CBS News. He is based in New York City.

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