Update: Microsoft quarter rescued by Office, Xbox sales

IDG News Service - Microsoft enjoyed strong income and revenue growth for its third fiscal quarter despite sluggish PC sales, with Xbox and Office doing well, the company reported Thursday.

For the quarter that ended March 31, Microsoft reported net income of $5.23 billion, up 31 percent from the same period last year. Third-quarter revenue was $16.43 billion, a jump of 13 percent. Diluted earnings came in at $0.61 per share, up 36 percent.

"We delivered strong financial results despite a mixed PC environment, which demonstrates the strength and breadth of our businesses," Microsoft Chief Financial Officer Peter Klein said in a statement.

Overall, Windows 7 revenue shrank by approximately 4 percent when compared to the same time last year, from $4.6 billion to $4.4 billion. The company attributed this slackening of demand to sluggish PC sales.

Other business units made up the difference, however. Buoyed by strong Microsoft Office sales, the Microsoft business division generated more revenue than the Windows unit this quarter. It generated $5.2 billion, a jump of 21 percent from last year's $4.3 billion.

Entertainment and devices division revenue grew by 60 percent, coming in at $1.9 billion this quarter, up from $1.2 billion a year ago, owing to strong sales of the Xbox, the Xbox Live service and the Xbox Kinect controller.

Server and tools division revenue grew by 11 percent, to $4.1 billion from last year's $3.7 billion, thanks to continued demand for Windows Server 2008 R2, SQL Server 2008 R2 and other products and services.

Shareholders are receiving a bonus this year of $0.05 per share, thanks to an audit settlement with the U.S. Internal Revenue Service that covered the tax years 2004 to 2006.

Not all the business units proved to be profitable, however. The online services division posted a $726 million loss, which is actually a 3 percent increase from the $709 million loss the year before.

The company's agreement to provide Yahoo with search technology has also been criticized for lackluster early results.

In a conference call, Klein argued that the company is still concentrating on improving user experiences for the services, which should bring greater revenue in the future.

With Microsoft's Bing search engine, "we have made great strides in relevancy and design," he said, while admitting that "revenue per search is below our expectations."

"While we are pleased with the progress we have made with Bing, there is significant work ahead to improve the monetization of the combined Yahoo and Bing marketplace," he added.

Klein also anticipated that the company's recent partnership with Nokia will help bring more customers to Windows Phone 7, which is part of the company's entertainment and devices division.

"Together, Nokia and Microsoft will integrate with greater speed and provide enhanced opportunities for users and partners to share in the success of the new ecosystem," he said.

For the immediate future, however, Microsoft will be relying more heavily on gaming sales and enterprises to spur growth.

"We feel great about how enterprises are investing in IT, and in particular, how they are interested in our product suite," Klein said. "Customers are adopting the whole suite of products, not just the Office applications--SharePoint, Dynamics and Lync. And that provides long-term sustainable growth."

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