Microsoft's third quarter: Office, Kinect pick up Windows slack

Microsoft's third quarter: Office, Kinect pick up Windows slack

Summary: Microsoft reported solid fiscal third quarter results as revenue topped estimates, but the software giant said the PC market was "mixed."


Microsoft reported solid fiscal third quarter results as revenue topped estimates, but the software giant said the PC market was "mixed."

The company on Thursday reported fiscal third quarter earnings of $5.23 billion, or 61 cents a share, on revenue of $16.43 billion, up 13 percent from a year ago. However, those earnings got a 5 cents a share boost due to a tax benefit. Strip out the tax gain and Microsoft came in at 56 cents a share, in line with Wall Street estimates.

But given the concerns about a weaker than expected PC market, Microsoft quarter turned out well. In a statement, Peter Klein, Microsoft CFO, said that the quarter demonstrated the company's "breadth of our businesses."

As for the outlook, Microsoft reaffirmed its fiscal 2011 outlook for its operating expenses.

Microsoft added the following color to its outlook.

  • For fiscal 2011, it expects the Windows unit to be in line with PC market growth. For fiscal 2012, Microsoft expects the corporate PC upgrade cycle to continue to outpace consumer demand.
  • The business division will see Office sales exceed PC demand in fiscal 2011, but then have tough comparisons in 2012.
  • Servers and tool revenue will track the hardware market and Microsoft expects to grow faster than the server market in fiscal 2012.
  • Online services revenue will track the online ad market, but in fiscal 2012 Microsoft expects Bing's revenue per search metrics to improve.
  • The entertainment and devices unit will see revenue growth of 25 percent in fiscal 2011 and 2012 will feature more momentum. Microsoft teased "more to be shared at E3 in June."

Indeed, Microsoft showed strong gains in Office 2010, Xbox and Kinect as well as servers and tools.

By the numbers:

  • Microsoft's R&D spending was $2.27 billion in the third quarter, up from $2.22 billion a year ago.
  • The Windows and Windows Live unit reported third quarter operating income of $2.76 billion on revenue of $4.44 billion. That was down from operating income of $3.07 billion on revenue of $4.65 billion a year ago.

  • Server and tools delivered operating income of $1.42 billion on revenue of $4.1 billion. The online services unit continues to lose money with a third quarter operating loss of $726 million on revenue of $648 million.

  • Microsoft's business division reported operating income of $3.16 billion on revenue of $5.25 billion.

  • The entertainment and devices division reported operating income of $225 million on revenue of $1.93 billion.

Topics: Banking, Enterprise Software, Microsoft, Windows

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  • Looks like all that R&D is making them lots of money

    Contrary to what someone on this sites likes to claim. :)
    Bill Pharaoh
    • RE: Microsoft's third quarter: Office, Kinect pick up Windows slack

      @Bill Pharaoh Exactly Bill! Exactly!!
      • But they had the first quarter that lags behind Apple in profits since 1990

        @JoeHTH: lets see if Apple will be able to increase the profits to $7 billion per quarter, and then to $8-9 billion.
      • woops.

        It finally happened.<br><br><a href="" target="_blank" rel="nofollow"></a>
    • Message has been deleted.

      Richard Flude
      • Sustainability

        @ Richard Flude

        The key question is whether Apple's business is sustainable, or whether competitors (Android, Windows Phone, BlackBerry) will push down market prices and eat away at Apple's margins, the way Windows PCs did in the 90s. Apple completely dominated the music player market, but it's dying, and as competing hardware/software combinations catch up with Apple, Apple may face challenges.

        Since Apple rely on end-user sales of a small set of products (rather than sales to multiple vendors who then sell wide ranges of products to end users), the risk with Apple is of another boom/bust cycle with the iPhone and iPad, like they had with the Mac in the 80s/90s. The iPhone is dominant in some countries (e.g. Germany), but Android is steadily gaining share, and Nokia's Windows Phones are on the horizon. If Android phones ever become as good as the iPhone, Apple will be in trouble.

        The same applies more or less to the iPad. If Google and Microsoft get their operating systems in shape for iPad-like devices (Android moving up from mobile phones and Windows moving down from PCs and stylus-based Tablets), the iPad may face strong competition too. I'm also personally a bit sceptical of the iPad, since I know several people who've bought them, but have only mediocre opinions of the device (in contrast to the iPhone, which gets very high praise).

        At the end of the day, Microsoft's two most profitable businesses (Office and Windows) are closely linked to the fortunes of the PC market. If the PC market does well, Microsoft do well, no matter which PC manufacturers are successful and which aren't (even Mac users often buy Office, and even Windows). Moreover, the PC market (at least in developed countries) is mature, which means competitors can only gain by convincing users to change from Microsoft to something else. The market for advanced mobile phones ('smartphones') is still growing, so if an Apple competitor can grab the momentum, they could do to Apple what Apple did to Nokia.
      • No point commenting under the new no criticism of ms rules

        Today's ZDNet is a joke. At least publish the new rules.
        Richard Flude
        • Sustainability required if you don't create products

          iPods in decline, iPads rising. Apple margins only sustainable during growth. They need to generate new markets, and they do so with a fraction of the R&D spend of MS, around 1/4th. Pointing out the fact will likely get this post deleted like original. On topic and addressing the original post.
          Richard Flude
      • Sustainability is required to reduce downside risk

        @ Richard Flude

        In terms of profit, developing new products for new markets increases the upside chance, if they're successful. Continually improving existing products to avoid losing existing markets reduces the downside risk. Both are important. Right now, MSFT looks like a blue-chip with a relatively low growth rate (for an IT firm), but also relatively small downside risk (especially for an IT firm).

        One of the keys to Microsoft's success in the 80s/90s was their ability to not only break into new markets, but to keep those markets once they had won them. More recently, they've been weak on the former, but still strong on the latter. (Apple have typically been strong on the former, except in the 90s, but often quite weak on the latter, e.g. losing early leads in the 8-bit market to Commodore, the 32-bit market to Windows PCs, etc.)

        Microsoft invest a lot in R&D, and much of that is used to stay ahead of the competition in markets they already dominate, i.e. to reduce downside profit risk. A not insignificant portion is also spent on basic research that isn't directly product related, and will only pay off years down the road (if ever). It's the same sort of thing IBM do, and that Bell Labs used to do, and is one of the reasons only IBM and Samsung generate more US patents than Microsoft (and Microsoft's patent growth rate is the highest of the three).

        As for deletion, I expect the reason is irrelevance. My previous post is only tangentially related to Microsoft, so I shan't be surprised (nor bothered) if it's deleted too. I personally think this one's relevant enough to merit keeping, but really shan't be bothered if it's deleted.
  • RE: Microsoft's third quarter: Office, Kinect pick up Windows slack

    Another sign Ballmer needs to go.
    The one and only, Cylon Centurion
    • Message has been deleted.

      Richard Flude
    • I disagree

      @ Cylon Centurion 0005

      Microsoft have managed to hold onto their key markets, even if they've been weak at entering new ones. If the Windows Phone partnership with Nokia becomes a viable competitor to iPhone and Android, Ballmer will have made up for his initial (infamous) dismissal of the iPhone. If Windows 8 slates do the same, Microsoft could capture a reasonable share of a growing market.

      Given the relative short-termism of the Anglo-Saxon capital markets, Nokia Windows Phones and Arm-based Windows 8 slates may be Ballmer's last chance (perhaps deservedly so). By any reasonable standard, however, steady profit growth isn't failure, even if the growth rate lags behind some other IT firms. Microsoft aren't failing like IBM were in the early 90s, or Apple were a few years later.
  • Message has been deleted.

    Solid Water
    • Message has been deleted.

  • RE: Microsoft's third quarter: Office, Kinect pick up Windows slack

    Solid product range, providing products that meet users requirements, spending lots of money in R&D, to determine what the user wants and needs and working hard to provide that product.

    Providing stability, support and 'safety in numbers'.

    Also showing that MS are making strong gains in the server and 'big iron' markets.

    They are certainly progressing at a much faster rate in technology than are any of its competitors.

    Microsoft always has had better quality products, even in the DR-DOS Vs MS-DOS when both were equally available people chose to use MS-DOS, when Win3.0 and 3.11 came out, people moved to that, at the same time there was Linux, and IBM OS (was so successful I have forgot its name), that was windows based.

    Everyone went with MS, because it had the quality, functionality, applications and support that users required.

    They have maintained that concept that is why there are where they are, doing very very well in the market.

    If there was one thing FOSS could learn off MS is how to create a product and service that the market actually wants.

    You do not and cannot expect the same level of stability, support or backing of products or services from an open source source.

    Nobody expects that, so if you need that level of quality and support, stability and backing MS is really the only source of software.