Microsoft's profits came in ahead of analysts' predictions when it announced its quarterly financial results today (Thursday). However, revenues grew by only 5% and the company fell just short of reaching $20 billion in quarterly sales. Worse, operating income was down by 4% to $8.2 billion -- and profits dipped $0.03 billion -- in what amounts to a mixed quarter. Microsoft actually increased its earnings from 74c to 77c a share, but was saved mainly by the fact that analysts expected it to do worse: 68c.
Microsoft had two big hits with the Kinect add-on for its Xbox games console, and Microsoft Office System 2010. "The 8 million units of Kinect sensors sold in just 60 days far exceeded our expectations," said Peter Klein, Microsoft's chief financial officer, in the earnings statement. This along with sales of 6.3 million Xbox 360 consoles helped boost the Entertainment Division's revenues by 55%. Meanwhile, the Microsoft Business Division's revenues grew by 24% as Office 2010 became "the fastest-selling consumer version of Office in history, with license sales over 50% ahead of Office 2007," Microsoft said.
The problem was the Windows and Windows Live Division, where revenues fell by 30% from $7.2 billion to $5.1 billion and operating profits tumbled from $5.4 billion to $3.3 billion in comparison with the quarter boosted by the launch of Windows 7. Basically, Microsoft sold $1.7 billion worth of upgrades before it shipped. Subtracting these "deferred revenues", the Windows division's sales grew by 3%, which is roughly in line with meager PC industry growth.
The result must also have been affected by the impact of Apple's iPad on sales of netbooks. In the conference call after the results, Microsoft said: "Within consumer PCs, netbooks declined from their peak last year while notebook growth remained healthy." Klein added:
"Bill [Koefoed] talked a little bit about netbooks and how netbooks hit their peak last year in Q2. What we've seen in course of this year in consumer space some of their volume being replaced by ultraportables and tablets. Normally these are secondary devices. That's caused a little bit of drag on the consumer side."
However, Microsoft said it had now sold more than 300 million copies of Windows 7, and that "nearly 90% of enterprise companies have started their formal migration to Windows 7".
The Server and Tools division -- which includes Windows Server and the Azure cloud version of Windows -- increased sales by 10% to $4.4 billion, and operating profits by 21% to $1.8 billion.
In Online Services, where Microsoft is investing a lot, revenues increase from $579 million to $691 million, but losses increased from $463 million to $543 million. This is an area where Google is minting it. In comparison, Microsoft's performance is appalling.
Microsoft also failed to say anything significant about Windows Phone 7, beyond the fact that manufacturers had shipped 2 million units. However, neither success nor failure would make any difference to Microsoft's financial results. We don't know how much Microsoft makes per copy, but let's guess $5 to $10. If it actually collected $10 each for 2 million phones, that would only come to $20 million or 0.1% of Microsoft's quarterly total of $19.95 billion.