Microsoft Breaks Records But Not With Windows 7

Microsoft’s continual parade of record revenues and earnings reports has become almost a sure thing, but one usual cash driver is missing from its third fiscal quarter results this time around — Windows 7.

Thursday, after the financial markets closed, Microsoft (NASDAQ: MSFT) did it again — reporting revenues of $16.43 billion for the quarter that ended March 31.

That constituted a 13 percent increase from the same quarter in fiscal 2010, and a new record.

The software giant’s officials credited strong sales of Office 2010 along with recently-updated servers and tools, as well as major sales of its Xbox 360 game console and the Kinect game sensor, which it says is the fastest-selling consumer electronics device in history.

Net income grew 31 percent from the year-ago quarter to $5.23 billion, while diluted earnings per share (EPS) were up 36 percent to $0.61. Operating income came in at $5.71 billion, an increase of 10 percent over last year’s third quarter.

The company underlined the quarter as the sixth straight period where IPS have packed double-digit growth.

Still, investors punished Microsoft in early after hours trading, with the stock falling nearly 2 percent to around $26.24. They didn’t have to look far to see the problem. Sales of Windows 7 were down, driven by slower sales in the OEM PC market.

“We delivered strong financial results despite a mixed PC environment, which demonstrates the strength and breadth of our businesses,” Microsoft CFO Peter Klein said in a statement.

Last Friday, on the 18-month anniversary of its launch, Microsoft announced it has now sold some 350 million licenses for Windows 7. It remains, Klein said, the fastest-selling operating system in history.

However, sales of new PCs have stagnated recently, dragging down sales of Windows 7 with them.

In a slide presentation accompanying the earnings release, the company pointed out that, while sales of business PCs during the quarter rose by 9 percent as the corporate PC “refresh” cycle continues, sales of consumer PCs fell by 8 percent.

All-in-all, total PC OEM revenue growth slid by some 3 percent — not unexpected but not good news in investors’ eyes either.

Still, the company had plenty to crow about with more about “fastest-selling” products.

Office 2010, which shipped last spring, is the fastest-selling version of Microsoft’s office productivity applications suite in the company’s history, company officials said in an afterhours call with financial analysts.

Additionally, the synergy between Office and Microsoft’s server packages helped to fuel the balance sheet.

“We delivered strong third quarter revenue from our business customers, driven by outstanding performance from Windows Server, SQL database, SharePoint, Exchange, Lync and increasingly our cloud services,” COO Kevin Turner said in a statement.

In fact, revenue from sales of severs and tools was up 11 percent from the same quarter last year, company officials said during the analysts’ call following the earnings release.

Turner also pointed to Office 365, the replacement for Microsoft’s cloud-based Business Productivity Online Suite (BPOS), which began beta testing earlier this month, as a potential anchor for sales going forward. Office 365 is due for commercial release later this calendar year.

“The introduction of Office 365 is targeted to take [Microsoft’s online business suite] to the next level,” Klein said during the follow up call.

Although analysts asked for further information regarding Microsoft’s recent deal to put Windows Phone 7 on Nokia’s smartphones, officials had little to add other than to point to natural synergies between the two companies.

Officials spoke little about when the company might begin delivering mass market tablet PCs, another sore spot with some analysts.

Klein also said that the company is currently postponing rolling out its joint advertising pact with Yahoo overseas while it works on increasing the deal’s monetization in the U.S. and Canada.

“[Currently] we are laser focused on getting the revenue per search up,” Klein added.

Stuart J. Johnston is a contributing editor at, the news service of, the network for technology professionals. Follow him on Twitter @stuartj1000.

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