Windows 7 Drives Microsoft to Profit, Record Revenue

Windows 7 helped drive Microsoft to record revenue during its fiscal third quarter, with profits increasing by more than a third versus a year ago.

Microsoft reported net income of $4.01 billion on revenue of $14.5 billion, an increase of 35 percent and 6 percent, respectively.

Microsoft said that revenue from its Windows division jumped by 28 percent to $4.42 billion, driven by "strong demand for Windows 7".

More than 10 percent of all Windows PCs are running Windows 7, the company said.

"Our first quarter results reflect our strong product momentum, a... focus on controlling costs, and the beginning stages of the return to business hardware spending," Peter Klein, chief financial officer at Microsoft, said in a conference call with analysts.

Microsoft said that it estimated PC unit growth at between 25 percent and 27 percent, with consumer PC growth estimated at about 30 percent, and business PCs at about 14 percent. Netbooks represented about 10 percent of sales. The OEM units in the Windows business that Microsoft sold, however, outpaced the PC market, growing 30 percent; OEM revenue grew 29 percent.

Microsoft showed growth in its Windows division, Entertainment and Devices and its Server and Tools business, but revenues slipped in its Business division. If $305 million in deferred revenue from the company's Microsoft Office 2010 Technology Guarantee program was factored in, however, the unit would have grown by 1 percent. Microsoft's Online Services division grew slightly.

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Microsoft reported revenue of $3.575 billion in its server business, versus $3.491 billion a year ago; Entertainment revenues also grew from $1.629 billion to $1.665 billion. Online Services revenue grew from $507 million to $566 million, probably on the strength of its Bing online services business. Microsoft's Business division declined from $4.508 billion a year ago to $4.243 billion.

Microsoft sold 1.5 million Xboxes, the company said, a 12 percent dip. That was in line with an "overall market decline," executives said. Non-gaming revenue was up 14 percent.

"Windows 7 continues to be a growth engine, but we also saw strong growth in other areas like Bing search, Xbox LIVE and our emerging cloud services," Klein said in a statement. "Our record third-quarter revenue along with continued rigor on cost management resulted in exceptional EPS growth."

Microsoft's Business Division reported adjusted customer revenue grew by 11 percent, after the Office 2010 deferral. Office 2010 will be generally available in June, with commercial availability in May, executives said.

All of Microsoft's units reported a profit, except for Online Services, which lost $713 million, more than it made in revenue. Here, though, Microsoft officials professed themselves pleased with the results, as Microsoft's Bing search engine grew each month to a U.S. query share of 11.7 percent, as measured by comScore. Online ad revenue grew 19 percent.

Microsoft did not offer guidance for its fiscal fourth quarter, projecting operating expense guidance of $26.1 billion to $26.3 billion for the full year ending June 30.

Microsoft said its Windows division would outperform the market; its Business division will track toward PC shipments in non-annuity sales. Annuity sales will be up in the low single digits, the company said. Microsoft's server and tools sales will be up in the mid-sngel digitas for annuity sales, and in line with non-annuity sales in hardware shipments. Services will up in the low single digits. Online services will be in line for the market, with sales from the Entertainment and Devices division roughly flat for the year.

The current quarter is Microsoft's fiscal fourth quarter, and Microsoft's sales team will be pushing hard to make its end-of-year numbers, Klein said. That sales push will correspond with the launch of Office 2010, Sharepoint 2010, the next iteration of SQL Server, and an "unprecedented wave of innovation" in the Entertainment division that will include Project Natal, Fable 3, Halo:Reach, and Windows Phone 7, all in the next few quarters.