Servers and Office drive Microsoft to $70bn revenue

Strong sales of Microsoft's server software, Office 2010 and Xboxes helped push Microsoft to record yearly and quarterly revenue, though a loss in Online Services weighed on its results
Written by David Meyer, Contributor

Microsoft has reported record-breaking revenue for the last year, powered mainly by healthy sales in its server, Office and Xbox divisions.

Revenue for the company's fiscal 2011, which ended on 30 June, rose 12 percent to $70bn (£43bn), Microsoft said on Thursday. For the fourth quarter, Microsoft posted revenue of $17.4bn, up eight percent year on year.

Net income was $23.2bn, up from $18.8bn for the year, and $5.9bn, up from $4.5bn, for the quarter. Those figures represent a 23.4-percent increase in annual profit, and a 30-percent increase in quarterly profit.

The company attributed much of the growth to enterprise deployments, and Microsoft's server and business divisions raked in $39.3bn between them for the year.

"Throughout fiscal 2011, we delivered to market a strong line-up of products and services which translated into double-digit revenue growth and operating margin expansion," Microsoft's chief financial officer, Peter Klein, said in a statement. "Our platform and cloud investments position us for long-term growth."

Microsoft's Entertainment and Devices division performed particularly well, with revenue up 45 percent for the year and 30 percent for the quarter. Much of this growth was down to healthy sales of Xbox 360 — the top-selling games console in the US over the past year — as well as the Kinect motion-sensing accessory.

However, that division only accounted for a relatively mid-sized $8.9bn in annual sales. Microsoft's strongest earner remains its business unit, which pulled in $22.2bn.

Throughout fiscal 2011, we delivered to market a strong line-up of products and services which translated into double-digit revenue growth and operating margin expansion.
– Peter Klein, Microsoft

Microsoft Office 2010 has been a big success, with sales of more than 100 million licences making it the fastest-selling version yet of the company's productivity suite. This helped business division sales grow 16 percent for the year, and seven percent for the quarter, compared with 2010.

Windows Server, System Center and SQL Server also shone, pushing revenue for Microsoft's Server & Tools division up 11 percent for the year and 12 percent for the fourth quarter. The division brought in $17.1bn for the year and $4.6bn in the quarter, showing it to be closing in on the Windows and Windows Live unit, which saw sales of $19bn and $4.7bn for the same periods.

Windows division

The Windows and Windows Live division did not fare so well, at least on paper. Revenue was down two percent for the year and one percent for the quarter.

This was largely down to a 2009 revenue deferral scheme that was linked to the Windows 7 Upgrade Option. This programme let people who bought Windows Vista machines just before the Windows 7 launch to get a free upgrade. Microsoft did the same thing when it launched Vista in 2007.

Around half the money Microsoft took in sales under the Upgrade Option during the fourth quarter of 2009 was deferred to 2010, artificially boosting revenue for that financial year and leading to the apparent drop in 2011.

Windows 7 has sold over 400 million licences and business deployments continue to accelerate.
– Microsoft

Given this, the Windows division actually saw revenue growth "in line with PC market growth of two to four percent", Microsoft said.

"Windows 7 has sold over 400 million licences and business deployments continue to accelerate," the company said. In April, that figure was 350 million.

A similar revenue deferral scheme for Office 2010 was partly responsible for $254m of the 2011 revenues from the productivity suite.

Online services

The company's smallest division, Online Services, saw 15-percent growth for the year and 17 percent for the quarter, and brought in $2.5bn for the year. Almost all — $2.3bn — of that revenue came from online advertising, a rise of 19 percent. Bing now has a 14.4 percent market share in the US, according to Microsoft.

Online Services was the only part of the business to make an operating loss, as it has in previous years. The loss appears to be deepening: it took in $2.6bn in 2011, a nine-percent drop, and $728m for the fourth quarter, a six-percent fall from the year before.

According to Microsoft, the Online Services weakness is due to higher operating costs associated with the Yahoo search agreement and "increased traffic acquisition costs". Microsoft licenses Yahoo's search technology and pays to have Bing used as the search engine for Yahoo's sites.

The company added that it has also taken on more research and development staff in Online Services, leading to higher costs.

Overall, operating income and diluted earnings per share were up 13 percent and 28 percent respectively for the full financial year, and four percent and 35 percent respectively for the quarter. Microsoft's share price ended up 1.4 percent down at the end of Thursday's trading.

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