Office 2010 Helps MSFT Beat The Street


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The Microsoft bears were wrong about this quarter. (Here’s the press release. Microsoft has also now made the 10Q available as a Word document.) The stock is up more than 3% after hours.

Revenues came in at $16.20 billion and EPS was $0.62 per share, both higher than analysts’ top estimates.

Profits rose 52% from last year, to $5.41 billion, although last year’s results include a big deferral from a Windows 7 guaranteed upgrade program.

The Business Division, which includes Office, provided a pleasant surprise as I thought it might: revenue came in at $5.13 billion, up 14% from last year and well ahead of most analysts’ estimates of under $5 billion.

Microsoft CFO Peter Klein noted on the earnings call that this division isn’t just about Office. SharePoint and Exchange Servers are both $1 billion businesses, and both showed revenue growth of more than 10% during the quarter.

He also insisted that the move to the cloud with products like Office 365 won’t cannibalise existing software sales, but will instead capture new revenue from customers who aren’t using as many Microsoft products today. That makes sense to me: running SharePoint in house is a non-starter for most small businesses, but subscribing to an online version of it might make sense.

Server & Tools also had a strong quarter with 12% revenue growth, thanks to increased IT spending on server hardware and associated licenses for Windows Server and SQL Server. This enterprise business isn’t sexy, but it’s shown almost uninterrupted revenue growth above 10% for the last eight years.

Windows is still Microsoft’s most profitable business, but revenue growth was more or less in line with PC unit growth of around 10%. (This segment’s results are complicated because of a one-time revenue deferral last year to account for a Windows 7 guaranteed upgrade program. Basically, as the PC market goes, so goes Windows.)

The Xbox business was no slacker either: Microsoft shipped 2.8 million consoles during the quarter, compared with 2.1 million a year ago. As a result, the Entertainment & Devices business earned $392 million on revenue of $1.80 billion. That’s a profit margin of 22%–not Windows, but pretty darn good. Give credit to Halo Reach, which took in $350 million in revenue during the quarter, and the impending release of Kinect.

Online was a bleak spot like usual, losing $560 million during the quarter, which still puts it on track for a $2 billion annual loss. 

Unearned revenue–a critical measure of the company’s success selling multiyear licensing agreements to big customers–came in at $13.92 billion. If you sub out last year’s one-time deferral, that’s up 8%, showing solid bookings for these long-term agreements.


Results for the company’s five business segments looked like this:

  Sept. 2010 Sept. 2009 Revenue     Windows & Windows Live Division  $         4,785  $       2,880 [4,350*]
Server and Tools            3,959          3,550 Online Services Division               527             487 Microsoft Business Division            5,126          4,514 Entertainment and Devices Division            1,795          1,412 Unallocated and other                   3               77   Consolidated  $       16,195  $     12,920 [14,390*] * [Bracketed] revenue numbers are without the one-time revenue deferral in last year’s quarter, which accounted for a Windows 7 guaranteed upgrade program. Microsoft didn’t report profit and loss numbers without the deferral.

Operating income (loss)     Windows & Windows Live Division  $         3,323  $       1,483 Server and Tools            1,630          1,237 Online Services Division              (560)            (477) Microsoft Business Division            3,388          2,827 Entertainment and Devices Division               382             260 Corporate-level activity           (1,047)            (848)   Consolidated  $         7,116  $       4,482

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