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

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?

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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, Software, Windows, Social Enterprise

About

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).

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

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  • Smart Analysis.

    Good analysis.

    I think Office 2010 demand will be high - coupled with SharePoint 2010 in the enterprise and upper midmarket space there has been a lot of buzz. This plays strong for annuity in business for Q4.

    I suspect Windows 7 adoption will continue to grow - people are upgrading their machines and while business hasn't quite jumped on full board many are testing and refreshing hardware. Business will take the split approach at first taking in new refresh and then seeing the sentiment that customers of XP have make the change over a lot faster.

    Xbox is turning the corner to continued profitability. Growth of the box is one thing... returning revenue on existing installs is another. Growing the revenue on existing boxes will sell through of services is a fantastic boon for Microsoft and shows why the Xbox's marketplace ecosystem is very smart.

    Windows Server and infrastructure management may continue to be a challenging area for Microsoft - businesses are virtualizing and stepping deeper into Microsoft's DataCenter editions. I believe that this will lead to a downward trend in overall # of sales.
    jessiethe3rd
    • Good analysis

      In the Server division the move to Datacenter is a boon for MS as it comes with more $$$ attached to it, while they also have Foundation server on the low end, and then the other Windows SKU's on the Server today, so they have tne entire market covered and can eat VMWare's lunch when it comes to cost (but not features) to which I anticipate HyperV to be getting much more feature parity with VMWare.

      WinMobile 7 will drive revenues for the entertainment division potentially with additiional XBOX Live and Zune subscriptions which means money is coming in on a monthly basis which is what everyone wants.

      Project Natal will be one to watch as well as I can imagine there will be a massive market for new games for the XBOX when this releases.

      Pat
      omdguy
  • Pity that no one is making profit from their Microsoft stock. For 10 years!

    MS stock value lost 15% yesterday because of their poor earnings report.
    The Danger is Microsoft
    • THERE YOU ARE!!! Phew!

      I thought for a minute that the ABM herd (y'know - you, DTS, DonnieBoy, Linux*) had been banned en-masse from ZDNet.

      So, yes, I'll grant you that few have made much money from MS stock in the last 10 years ... except for the millions who owned stock issued circa '96 who've earned considerable sums from their earlier-issue stock.
      de-void-21165590650301806002836337787023
  • Upgrades

    So, we know that MS gets a Win7 sale with each new computer sold, but, what about the Win7 upgrades sold to XP and VISTA users?

    How is their customer retention? Defection rate? Any increase in sales of WHITE boxes with NO OS?
    BrentRBrian
  • Big upgrades to Office 2010 likely

    According to Microsoft, 70% of their Office installs are at Office 2003 or earlier. Most skipped 2007. That suggests a big upgrade bump from 2010 in the coming quarters.
    zackers
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  • RE: Is Online cannibalizing on-premises

    Interesting that:
    As interest in online goes up, so do the losses. Does MS net any money from this?

    As interest in online goes up, server and Office sales are flat. Does that mean Exchange and SharePoint customers are simply moving online, with little net benefit for MS
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