Earnings take-away: Microsoft is still powered by Windows

Earnings take-away: Microsoft is still powered by Windows

Summary: Microsoft's brass is always looking for the next billion dollar business and has stuck a toe into everything from healthcare to energy monitoring. But as the company's second quarter earnings for fiscal 2010, which Microsoft released on January 28, show, Windows is still the big wheel that keeps on turning in Redmond.


Microsoft's brass is always looking for the next billion dollar business and has stuck a toe into everything from healthcare to energy monitoring. But as the company's second quarter earnings for fiscal 2010, which Microsoft released on January 28, show, Windows is still the big wheel that keeps on turning in Redmond.

Consumer sales of Windows 7 buoyed Microsoft to report record earnings, even after deferrals were figured in. Microsoft reported net income of $6.66 billion, or 74 cents a share, on revenue of $19.02 billion, which included $1.71 billion in Windows 7 deferred revenue for the quarter.

As part of that announcement, Microsoft reported that it has sold more than 60 million Windows 7 licenses to date. The combined Windows and the Windows Live division had operating income of $5.39 billion on revenue of $6.9 billion, compared to the year-ago quarter's operating income of $2.71 billion on revenue of $4.06 billion.

Business sales of Windows 7 -- unsurprisingly, given typical enterprise sales, testing and deployment cycles -- have yet to kick in for Windows 7. That isn't because business users are waiting for Windows 7 Service Pack (SP) 1, which is widely expected to ship some time this calendar year, Microsoft officials said. In fact, Microsoft is seeing more business activity around upgrades to the latest version of Windows than it has with previous launches, according to Microsoft's new Chief Financial Officer Peter Klein.

"People want Windows 7 on all devices on all form factors," said Klein during today's call with Wall Street analysts. (In case you were wondering, that question wasn't prompted by a question about the Apple iPad. Nobody asked about it during the Q&A session.)

Klein noted that netbooks currently comprise about 11 percent of the PC market and Windows is currently on 90 percent of these machines. Windows 7 is more than half of that base (XP, and to a much lesser extent, Vista) are on the rest of the Windows netbooks.

Yes, Office is still the other big Microsoft cash cow (with revenues of $4.74 billion for the Business Division this quarter), and that unit ended up really kicking in for Microsoft when the economy and Vista sales were down. But in Q2, Business Division revenues and operating income were both down, compared to the year-ago quarter. Microsoft officials attributed the decline, in part, to the imminent arrival of Office 2010. (Office sales comprise more than 90 percent of the Business Division's revenues; Dynamics products are the other 10 percent.)

(Detailed breakdowns for each division can be found in Microsoft's latest 10-Q, filed on January 28.)

Server and Tools held its own (revenues up two percent, primarily because of Enterprise Client Access License (CAL) suites, System Center and SQL Server). But services/consulting revenues were down two percent, or $32 million. The Online Services Division (the search/advertising unit) is still in the red. Online access (dial-up) continues to plummet, and online advertising was off. In Entertainment and Devices, gaming console and game sales were down, but Xbox Live revenues were up.

Here's a more detailed breakdown by division of revenue and operating income (click on the image below to enlarge).

Microsoft cut 800 jobs in the second quarter of FY 2010 and spent $59 million in severance payments. No analyst on today's call asked whether there would be more layoffs planned for this year. The Softies did say they planned to continue to keep a tight rein on costs. While the Windows division spent more than usual on sales/marketing because of Windows 7 launch-related activities and ads, other divisions cut back on not just headcount, but also sales and marketing, as well as research and development expenses.

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


Mary Jo has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

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  • not for long

    Linux is eating M$ lunch.
    Linux Geek
    • Still peddling that crap? Don't you get tired of always being wrong?

      • Unfortunately not...

        ...because people keep responding to him which just feeds his stupidity.
        • MS should be happy for Linux Geek

          he serves very well to reinforce the Linux Geek stereotype, hmmm, are you actually working for MS LG? Steve B. says keep up the good work buddy.
          • Sometimes I think that. (nt)

            Lester Young
      • loves the sound of his words.

        Whats that old saying??? Your words make sense only to yourself.
    • Sorry, but you have to be in your own little world

      To say that, when Linux is STILL less than 1% of PC's in the market!
      • Too early to tell

        Yes, Linux is still at 1% of the market. However, open source as a whole is definitely eating away at Microsoft's market share in multiple areas, not just at the operating system level. Sure, if you are a Microsoft fan, go ahead and keep using its software, but keep your wallet handy so that you can pay your dues over and over. Microsoft is (and has been) strongly opposed to open source. I used to be a Microsoft fan but because they keep everything proprietary and expensive, I steered away to Linux and open source software which is MUCH more affordable and can handle the same tasks, and is VERY flexible and powerful all at the same time.
        • Do some research....

          Then stop dilluding yourself, all business will make money or close shop. Even the fabled Google makes money off of open source. That is in the DNA of free enterprise. Dont like it move to a truly communist society.
          • I agree, but...

            There is also a difference between making money and squeezing every drop out of customers. Microsoft purposely devises strict channels that customers must follow in order to use its software. These channels force its customers to pay and repay over and over again just to keep things running and/or stay compliant with its licensing schemes. In the end, you end up hurting the customer rather than helping the customer stay as a customer.
          • Quick question

            So are you trying to say that Cutomers who use MS software are enduring losses?
          • yes

            Indirectly yes. I am a partial owner of a small business and we would probably not be in business today if we would have used Microsoft products (Windows Server, MS Office, etc.). Using open source software we have kept our costs to a minimum.
          • What's the cost per year........

            ...of, say, a WinXP license for someone who's had it since 2003? Considering that includes a Service Pack and other support, it's not a bad deal.
            Lester Young
          • for now, but...

            None at the moment. But what will you do when Windows XP is end-of-lifed? It's been in Microsoft's scope for a while now, with the date being pushed back due to customer feedback and slow migration to Vista/7. Sure, you can use it past the end-of-life date, however by then it will be terribly outdated and very unsecure.
          • oh you mean like running...

            Windows 2000 to this date or IE6 8 years after its first iteration, or maybe Zune 30 still getting firmware updates since 2006, Xbox360 still upgrading for free since 2005. So those examples close in the consumer and hold them to futher fees???
            Step away and come back after you truly understand a real companies idea of compatibility, ease of use, desire to match what a customer wants and needs to what they can produce.
          • yes

            Precisely my point. If you are running Windows 2000, IE6, etc. you will surely feel crippled at this point since Microsoft is pulling the plug later this year for updates. After that you can either open up your wallet and buy a new copy of Windows, or put yourself at a great security risk. Not only will you need to buy a new version of Windows, but you will probably need a new PC to add to that expense. You would probably already be partially crippled since Microsoft has stopped releasing software for it since 2005 along with many 3rd party vendors. On the other hand, I can freely upgrade a machine from the same era with a new copy of Linux and it will probably run fairly well, and get the latest and greatest updates all at once. Once on the open source train, I do not need to worry about software purchases, just hardware. I've been in various educational, corporate, and enterprise environments and can still say this holds true a majority of the time. Sure, there will be niche situations that do not follow this.
        • Too early?

          After more than 15 years of being nobody in people minds you think it is too early to tell?

          MS sales grew up by 60% from october to december just thanks to Windows 7, get over it.
    • Given that Linux can't make money for itself...

      it has no choice but to eat Microsoft's lunch :)
      • lmfao

      • LMFAO....NT