Where did Microsoft spend its money last quarter?

Microsoft reported a better-than-expected fourth quarter and ended its fiscal 2010 with a bang, according to numbers the company released on July 22. Where did the Softies end up spending?
Written by Mary Jo Foley, Senior Contributing Editor

Microsoft reported a better-than-expected fourth quarter and ended its fiscal 2010 with a bang, according to numbers the company released on July 22.

My ZDNet colleague Larry Dignan has the breakouts. He notes that the symbolic race between Microsoft and archrival Apple has gone to Microsoft one more time, with Microsoft generating $16.04 billion in revenues for its latest quarter, compared to Apple with $15.7 billion for its most recently reported quarter. Net income for Microsoft for the fourth quarter was $4.52 billion, compared to Apple's latest quarter's net income of $3.25 billion.

Microsoft's Windows division, its Business unit (home of Office) and Server and Tools group all had a strong quarter. Microsoft said the company has sold 175 million licenses for Windows 7 to date. Microsoft's Online Systems Business continued to lose even more money than it has previously, with $696 million in losses for the fiscal fourth quarter, and $2.36 billion in losses for the year. The Entertainment and Devices division lost money this quarter, too, to the tune of $172 million.

(I know Microsoft is really pushing itself as a consumer-focused company these days, but I still find it jilting that Microsoft officials crow about consumer uptake of the company's products, even though business sales are still just as strong, if not more.)

Where is Microsoft spending its billions? The company's latest 8-K, filed today, itemizes some of the places where the Softies spent heavily in its fiscal Q4 2010. From the 8-K:

  • Cost of revenue increased $584 million or 23%, primarily reflecting increased online costs, increased royalty costs and charges resulting from the discontinuation of the KIN phone. Microsoft said thesee costs were partially offset by offset "decreased Xbox 360 console costs and reductions in other costs due to resource management efforts."
  • Sales and marketing expenses increased $410 million or 13%, primarily reflecting increased advertising and marketing of Windows 7.
  • Research and development expenses increased $125 million or 6%, primarily reflecting the capitalization of certain software development costs related to Windows 7 product development in the prior year.

The Softies saved some money seemingly by heading off and/or settling some law suits. According to the 8-K, "general and administrative expenses decreased $82 million or 8% due mainly to decreased legal charges." For the entire fiscal year, however, general and administrative expenses increased $304 million, or 8%, the 8-K states,"due mainly to increased legal charges and transition expenses associated with the inception of the Yahoo! Commercial Agreement, offset in part by a reduction in headcount-related expenses."

During a follow-up call with Wall Street analysts, Microsoft officials were asked about the company's plans for tablets. Chief Financial Officer Peter Klein gave a roundabout answer, noting the growth of the tablet segment "reminds us of lots of new and interesting scenarios we are continuing to work on" with OEM partners. But he didn't offer any specifics about the new Windows slates coming this holiday season to which officials have been alluding.

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