Microsoft posts record earnings despite netbook cannibalization

Microsoft has released its earnings statement for the first quarter of its financial year 2012, and it’s been another bumper quarter for the software giant. Revenue of $17.37 billion is a first quarter record, up 7 percent year-on-year, and beating analyst estimates of $17.2 billion. Operating income was $7.2 billion, net income was $5.74, and earnings per share were 68¢, year-on-year increases of 1 percent, 6 percent, and 10 percent, respectively. The big gains came from business sales of Office, Microsoft’s various server applications, and to a lesser extent, continued strong performance from Xbox 360.

 

Best Microsoft MCTS Certification, Microsoft MCITP Training at certkingdom.com

 

Windows and Windows Live division posted revenue of $4.87 billion, up 2 percent on the same period last year. Windows 7 continues to sell well, hitting total sales of 450 million in September. The overall PC market grew by between 1 and 3 percent, and OEM licenses grew by 4 percent, year-on-year, with that growth stronger in emerging markets than developed ones. The business PC market grew by 5 percent, to some 35 million PCs, with sales of licenses to business customers growing by 6 percent. The overall consumer market was flat. Sales of traditional PCs to consumers were up sharply, by 14 percent. However, these gains were offset by a similarly sharp reduction in sales of netbooks, a market that Microsoft says is being “cannibalized.” Looking forward, the company is counting on Ultrabooks to boost Windows sales.

Revenue from the Microsoft Business Division rose 8 percent year on year to $5.62 billion. No problems with the consumer market here: revenue from consumer Office sales grew 7 percent year on year. Multiyear license revenue (Software Assurance) was up 9 percent. Business transactional revenue was up by 3 percent, again driven by growth in developing markets. Particular highlights for the group were sales of Lync, up 25 percent; SharePoint and Exchange, both up “double digits”; and Dynamics, up 17 percent year-on-year. Office 365 has had a successful start, gaining as many new customers in the first ten weeks of availability as its predecessor, BPOS, achieved in two years. The group is also enjoying greater cross-selling; 80 percent of customers buying Exchange are also buying SharePoint and Lync.

Server and Tools earned $4.25 billion, up 10 percent on last year. Windows Server and System Center both experienced “double digits” growth, SQL Server revenue increased by almost 20 percent, and Enterprise Services revenue grew by 17 percent.

Online Services continues to lose money. Revenue was up 19 percent year-on-year to $0.63 billion, and the division’s loss was down: $0.49 billion this quarter, compared to $0.56 billion in the same period last year. Bing’s market share continues to creep upwards, with US market share of 14.7 percent, up by 3.5 points from Q1 2011. Including the Bing-powered Yahoo! share, Bing was used for 27 percent of search traffic in the US. Revenue from online advertising was up nearly 21 percent, driven by this growth in the search share.

Microsoft and Yahoo! both recognize that there are continued difficulties in making a financial success of this partnership. Speaking about Microsoft’s rejected takeover bid for Yahoo! in 2008 at the Web 2.0 Summit in San Francisco this week, Microsoft CEO Steve Ballmer admitted that that “sometimes you’re lucky” that these bids fail. However, Microsoft says that the two companies are “partnering closely” to resolve the difficulties. All this amid continued rumors that Redmond might yet try to buy the search and content company, possibly in a joint bid, or that cofounder Jerry Yang might put together a private equity bid to take over the company.

Entertainment and Devices Division revenue was $1.96 billion, up 9 percent on last year. The strong performance is all down to Xbox. The Xbox 360 console has been the best-selling console for nine months straight, and more than 3 million copies of Gears of War 3 were sold in the first week of its release. Also in this division is Windows Phone. Microsoft continues to avoid providing sales figures or any other concrete information about its smartphone platform. Last quarter saw the well-received Mango update, and the current quarter will see a range of new Mango-focused phones hitting the market—including Nokia’s first Windows Phone devices. Redmond also said that it had signed an agreement with Samsung to increase the level of development and marketing collaboration between the two companies.

All in all, it was a strong quarter for the company. Enterprise and business sales are growing vigorously, and new products such as Office 365 and Lync appear to be gaining traction in the market. Perhaps the biggest concern is the performance of the Windows division, and the “cannibalization” of netbook sales. Though unstated, the poor netbook performance is a result of strong tablet sales, and Microsoft won’t have a credible tablet operating system until the release of Windows 8. Ultrabooks may partially counteract the tablet attack, but PC vendors have expressed doubts over the Ultrabook strategy. Either way, the results show just how important Windows 8 will be to Microsoft’s future.

From next quarter, Skype’s revenue will be included in Microsoft’s earnings. With the purchase meeting the approval of regulators around the world, we might finally learn just what it is that Redmond intends to do with the VoIP provider.