An often irreverent look at this week's Microsoft's quarterly results, including an examination of a record quarter for the software giant, why Windows sales aren't as bad as everyone desperately wants to believe, the continued success of Microsoft Office, how Microsoft's other product lines fared, plus a ton of tidbits from the post-earning conference call.
Microsoft Sets Financial Records in Quarter as PC Sales Continue to Grow
The mainstream press is misrepresenting this story nicely, so let me set the record straight. Microsoft on Thursday posted what it describes as "record first quarter results," with a $5.74 billion profit (up 6 percent year over year) on revenues of $17.37 billion (up 6 percent). The results constitute the software giant's biggest-ever first quarter revenues--let me say that again, its biggest-ever first quarter revenues--and it comes at a time in which the PC business is supposedly slowing. (It's not. Growth is "low" compared to new, unrelated businesses, but still steady, at about 3.6 percent. Not bad for a dominant, 30-year-old business, eh?)
Microsoft Financials: Windows
Speaking of money, let's take a look at one of Microsoft's biggest money makers, Windows. The Windows Division posted revenues of $4.87 billion in the quarter, up 2 percent year over year. There's a lot of angst out there because Windows sales growth is lower than that of newer businesses, like those for smartphones and tablet computing devices. But Windows based PCs still dominate the PC market, and the thing people forget is that this product line is simply dominant, so growth is never going to happen at a huge rate. But what does happen at a huge rate is actual sales: Windows PCs still control a business of between 350 million and 375 million units per year. Want another fact? Using this quarter's respective results at Apple and Microsoft as a view for a full year of sales, Apple's iPad sales will represent, at most, about 10 percent of the sales of the wider PC market in the same time period. So, we get it, mainstream media: Apple sales growth is up dramatically. But the iPad is starting from scratch, and the PC market is huge, and mature, and supposedly sputtering. And 365 million units--2011's expected figure if total year growth was 3.6 percent, as it was in the quarter--is still a much bigger number than the less than 40 million iPads Apple will sell. And did I mention Windows 8 was coming? Will it trigger an iPocalypse? I guess we'll have to wait and see.
Microsoft Financials: Office
The biggest winner this quarter, perhaps, was Office, which posted revenues of $5.62 billion, a jump of almost 8 percent year over year. Why is this impressive? Microsoft delivered its last major Office release, Office 2010, in this quarter a year ago, so the Office division (really called Microsoft Business, for some reason) was actually going up against the first-ever quarter of its best-selling-ever version of Office. And it still came out on top. Now, how did that happen? According to Microsoft, part of it is continued and strong sales of its Office 2010 suite of applications. But part of it, too, is a stronger-than-expected showing for the just-released Office 365 online services. You know, that software market that Microsoft was never going to be competitive in.
Microsoft Financials: Server & Tools
Microsoft's other behemoth division, Server & Tools, posted $4.25 billion in first quarter revenues, a 10 percent increase over the same quarter a year earlier and, more important, the sixth consecutive quarter of double-digit revenue growth. Put another way, Microsoft's top three businesses--Windows, Office, and Server--posted $14.75 billion in revenues in the quarter, or approximately 85 percent of the company's overall revenues. Not too shabby for boring, traditional software businesses, none of which released new product versions in the quarter, which are also getting squeezed out by faster, newer and more exciting online rivals. Cough.
Microsoft Financials: The Rest
OK, we've heard from the Big Three at Microsoft, which make up 85 percent of the company's revenues. What about the other 15 percent? Looked at in order of immediate importance (i.e., revenues), we see ... well. Not much. The Entertainment & Devices division, which is responsible for the Xbox 360, posted revenues of $1.96 billion, up 9 percent, but the profit was only $352 million. Microsoft's still-struggling Online Services division had revenues of $625 million, up a whopping 19 percent, but it actually lost money, with a net loss of $494 million. As for the rest of the company, Microsoft notes that it released Windows Phone 7.5 and completed its purchase of Skype in the quarter. So that's pretty much it. In the making-lemonade department, Bing's US market share was 14.7 percent in the quarter, while combined with Yahoo, it controlled 27 percent of the market. And of course, the Xbox 360 was the top-selling gaming console in the US for nine consecutive months, so far, something that will surely continue through the holidays.
Microsoft Financials: The Conference Call
Microsoft posts a ton of information to its website every time it reports earnings, but the really interesting stuff happens in the post-earnings conference call. This quarter, there were some great tidbits, largely from Microsoft CFO Peter Klein. Such as...
· 15 months after the release of Office 2010, consumer PC attach rates continue to grow, by 7 percent. Business sales were up 3 percent.
· The "early success of Office 365" has surpassed Microsoft's expectations.
· Windows 7 is now the operating system of choice for almost half a billion people around the world.
· Online ad monetization continues to perform below expectations.
· Microsoft will integrate Skype across its portfolio of products and services including Lync, Windows Live Messenger, Windows Phone, and the Xbox platform.
· Business PC sales grew 5 percent to a quarterly record of almost 35 million PCs. Consumer PC sales were flat, thanks to slowing netbook sales. But sales of Windows licenses on traditional consumer PCs showed healthy growth of 14 percent.
· Gears of War 3, which is only available on Xbox 360, sold 3 million units in its first week of release. There are nearly 35 million Xbox LIVE users.
This Week, on the Windows Weekly Podcast
Mary Jo and I will record a new episode of the Windows Weekly podcast with guest co-host Iyaz Akhtar on a different day and time: This week, it happens Friday at 12:30 ET/9:30 PT if you want to tune in live. It should be available for download by the end of the weekend on iTunes, the Zune Marketplace, and wherever else quality podcasts are found, in both audio and video formats.
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