Under-the-radar tidbits from Microsoft's third-quarter 2010 earnings

Summary:Windows 7 and overall PC growth buoyed Microsoft's third-quarter FY 2010 earnings of $14.5 billion and .45 per share. As many news outlets and bloggers have reported, approximately 10 percent of PCs are now running Windows 7. Microsoft officials are crowing that "the business PC refresh cycle has begun." But what else was interesting about this quarter's numbers?

Windows 7 and overall PC growth buoyed Microsoft's third-quarter FY 2010 earnings of $14.5 billion and .45 per share. As many news outlets and bloggers have reported, approximately 10 percent of PCs are now running Windows 7. Microsoft officials are crowing that "the business PC refresh cycle has begun."

But what else was interesting about this quarter's numbers? Here are a few things I noticed in scouring the company's newly-filed 10-Q and other related documents/reports, as well as by listening to Microsoft's earnings call with Wall Street:

* Microsoft deferred $305 million in revenues as a result of its Office 2010 Technical Guarantee. (Via the Technical Guarantee, Microsoft and its OEM partners will provide customers who are bought Office 2007 starting in early March, with a free copy of Office 2010.) Is that an early indicator of strong demand for Office 2010 (which released to manufacturing in mid-April) or a weak one? I'm not sure.

Directions on Microsoft analyst Matt Rosoff tweeted that he considered small business spending on Office to be weak. Microsoft has been stepping up its small- and mid-size outreach programs, as of late, so maybe Microsoft is attempting to get the "500 PC-and-under crowd" onboard early with Office 2010....

* Microsoft's Online Systems Division (OSD) is still in the red. In fact, it is $713 in the red for this most recent quarter. Microsoft did pay Yahoo $78 million as part of agreed-upon transition expenses as part of their 10-year partnership. (Via that partnership, Microsoft is providing Yahoo with much of its search results, and Yahoo will be selling ads for Microsoft.) Those Yahoo expenses were reported as part of Microsoft's General and Administration expenses, though, not as part of OSD expenses. Microsoft expects financial contributions from the Yahoo partnership to begin kicking in the second half of FY 2011 (which means after the start of calendar 2011), officials said.

* Windows consumer license growth was up more than 35 percent, but that increase didn't come at no cost. according to the 10-Q. "Sales and marketing expenses increased $105 million or 23% (compared to the comparable quarter a year ago), reflecting increased advertising and marketing of Windows 7 and increased sales force expenses related to Windows 7."

* Microsoft is now claiming it has 40 million paid seats of its commercial online services, which include its Business Productivity Online Suite (BPOS), Exchange Online, SharePoint Online, Communications Online, Live Meeting, partner-hosted online services, and other paid cloud services.

* Paid services were big for Entertainment and Devices (the Xbox, Zune and mobile phone part of the company), too. "Xbox LIVE revenue and non-gaming revenue, offset in part by decreased revenue from Xbox 360 video games and decreased Xbox 360 consoles sold," according to Microsoft. Increased sales of Windows Embedded platforms and PC hardware were up, too.  Microsoft's recently unveiled Kin and Windows Phone 7 platforms aren't shipping until May, and "holiday 2010," respectively, so there was no uptick from mobile.

* Patent infringement suits continue to be a bane of Microsoft's existence. "There are over 50 other patent infringement cases pending against Microsoft, 10 of which are set for trial in fiscal year 2010," according to the 10-Q -- beyond the ongoing Alcatel-Lucent, Uniloc, i4i and VirnetX cases.

* Microsoft still isn't proclaiming the IT spending market to be back on course. Hardware sales arecoming back first, company officials said, but overall IT spending is still slow in coming back. Microsoft's fourth quarter traditionally is the company's strongest, and because its sales and product cycles -- with Office 2010, SharePoint 2010, SQL Server 2008 R2 and other products all hitting the price lists in the coming couple of months -- Q4 should be even stronger than usual, officials said. Microsoft is advising investors that it expects non-annuity growth to pick up in next two to three quarters.

Anyone else notice anything interesting in today's earning reports?

Topics: Operating Systems, Banking, Enterprise Software, Microsoft, Social Enterprise, Software, Windows

About

Mary Jo Foley has covered the tech industry for 30 years for a variety of publications, including ZDNet, eWeek and Baseline. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008). She also is the cohost of the "Windows Weekly" podcast on the TWiT network. Got a tip? Se... Full Bio

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