Microsoft Earnings Boosted by Business

Businesses provided more of a boost for Microsoft than consumers in the fiscal year results announced yesterday, with sales of Microsoft Office and server software leading its revenue, followed nonetheless by the Xbox gaming related sales.

Consumer revenue around PCs declined 8 percent while business sales of PCs grew by 27 percent. Microsoft estimated that the worldwide PC market declined by 2 percent in the past 12 months, sullied by weak sales in developed markets.

"In summary, we are pleased with the terrific market response to our products and our great sales execution, both of which helped drive our solid financial results," said Microsoft Chief Financial Officer Peter Klein during the follow-up conference call after the earnings announcement yesterday. "We also continue to be excited by our strategic investments and alliances, which will allow us to capitalize on long-term growth opportunities."

Going forward, Microsoft is betting that a number of new technologies will provide significant revenue in the years to come. One is the Office365 service, which the company introduced in June.

"With Office365, we've created new market opportunities for Microsoft Office and our partners," Klein said. Office365 will help Microsoft "increase revenue and profit per seat," he said. "It gives us an opportunity to address the part of the workforce that does not regularly use a PC in the workforce."

Challenges and Contenders

Another bright spot seems to be Azure. Klein mentioned significant customers that use Microsoft's cloud service, including Boeing, Pixar and Toyota. He did not reveal revenue generated by Azure, though.

Klein was also confident that the pending acquisition of Skype will bear fruit. "With Skype, we will increase the acceptability of real-time voice and communication to both consumers and enterprises, generating new business and revenue opportunities for Microsoft," he said.

Klein, however, did not mention Windows Phone 7, nor the company's Nokia partnership, during the webcast. However, he spent some time answering an analyst question about another phone operating system, the competing Android platform. He said that Android violated some of Microsoft's patents and the company would collect licensing fees from this infraction. Klein declined to specify how the money from such licensing would be factored into Microsoft's overall finances, though. "We haven't talked a lot about what to expect from a modeling perspective. So let's see what we do with our licensing program going forward," he said.

Microsoft executives also did not address the growing tablet market in relation to the softening PC market, other than to mention that, with Windows 8, "we are re-imagining Windows for a new generation of touch-centric hardware," according to Bill Koefoed, Microsoft general manager of investor relations.

The executives took some time to address the company's relations with Yahoo.

Earlier this week, Yahoo reported lackluster fiscal results in part because its partnership with Microsoft for ad sales brought in less money than expected. "During the quarter, we partnered closely with Yahoo to uncover and address several platform gaps and inefficiencies. We still face monetization challenges and will continue to work closely with Yahoo. We remain confident in the long-term potential of the combined search market," Klein said.

Business Division Growth

Microsoft Business Division's revenue for the fourth quarter grew by 16 percent for the year and 7 percent for the quarter, thanks to the recent launch of Microsoft Office 2010, which has already sold 100 million licenses. The division reported $5.8 billion in revenue for the fourth quarter and $22 billion for the full year, eclipsing revenue of Microsoft's flagship Windows and Windows Live Division, which oversees the Windows operating system.

In addition to business sales of Windows 7, sales of other Microsoft products were particularly strong in the enterprise market. Microsoft Dynamics grew by 19 percent, and now enjoys a user base of 2 million. Premium Windows Server and System Center sales grew by 20 percent. SQL Server premium services revenue grew almost 20 percent.

"Customers are using Microsoft technology to virtualize their data center and build out private cloud environments," Koefoed said.

For the fiscal year ending June 30, Microsoft generated US$69.94 billion in revenue, an all-time high for the company and a 12 percent increase in revenue compared to fiscal 2010. Of this revenue, $23.15 billion was net income, a 23 percent increase from the prior year.

For the fourth quarter of fiscal 2011, Microsoft reported revenue of $17.37 billion, an 8 percent increase from the same period a year prior. Net income was $5.87 billion, a 30 percent increase.

Revenue Breakdown

Windows and Windows Live Division actually declined by 2 percent for the year, and 1 percent for the quarter, as demand for personal computers stagnated during this period of time. This division posted $4.74 billion in revenue for the fourth quarter and $19.02 billion for the year.

Revenue from Microsoft's Server and Tools division grew by 11 percent for the full year and 12 percent for the fourth quarter, as increased demand for Windows Server, System Center, and SQL Server continued unabated. Server and Tools reported $4.6 billion for the fourth quarter and $17 billion for the year.

The Entertainment and Devices Division posted the largest revenue growth for the company, swelling sales by 45 percent for the full year and 30 percent for the fourth quarter, thanks to sales of the Xbox game console and associated games and services. This division generated $1.5 billion in revenue for the quarter and $8.9 billion for the year.

For the fiscal year 2010 overall, the company reported revenue of $62.48 billion, and net income of $18.76 billion. That year, Microsoft recorded fourth quarter revenue of $16.04 billion and net income was $4.52 billion.

With these earnings, Microsoft bested analyst estimates across the board. Analysts expected the company to generate $17.23 billion in revenue for the quarter and $61.72 billion for the fiscal year, according to a poll by Thomson One Analytics. Net income was expected to come in at $4.9 billion for the fourth quarter and $22 billion for the year.

Joab Jackson covers enterprise software and general technology breaking news for The IDG News Service. Follow Joab on Twitter at @Joab_Jackson. Joab's e-mail address is Joab_Jackson@idg.com