Update: Microsoft earnings again buoyed by Windows 7

Windows 7 has once again kept Microsoft's balance sheet healthy. On Thursday, the company announced strong income and revenue growth for its third fiscal quarter, thanks in part to continued brisk sales of the new OS.

For the quarter ended March 31, Microsoft reported net income of $4.01 billion, up 35% from the same period a year prior. Third-quarter revenue was $14.5 billion, a jump of 6%. Earnings came in at $0.45 per share, beating analysts' expectations by $0.03 per share, according to a poll by Thomson Reuters.

As in the previous quarter, Windows 7 provided much of the boost needed to achieve the positive numbers, Microsoft Chief Financial Officer Peter Klein said in a statement. He also pointed to the company's Bing search, Xbox Live and emerging cloud services as areas of growth.

Overall revenue from Windows sales was up 28% compared to the same period a year earlier. Microsoft took the opportunity to note that 10% of PCs worldwide are now running Windows 7.

The Windows & Windows Live Division pulled in $4.41 billion in revenue for the quarter, up sharply from $3.45 billion a year earlier. Other divisions reported more modest gains: The Server and Tools group pulled in $3.57 billion, up from $3.49 billion last year; Entertainment and Devices was up slightly at $1.66 billion, from $1.63 billion a year earlier; and Online brought in $566 million, up from $507 million.

Only the Business Division did not report a gain, reporting revenue of $4.24 billion, down from $4.5 billion a year earlier.

The quarterly results factor in $305 million of deferral of revenue related to the Microsoft Office 2010 Technology Guarantee program, which promises Office 2007 customers free upgrades to Office 2010 when that software is released.

In a conference call with analysts, Bill Koefoed, Microsoft general manager for investor relations, articulated some of the buying trends the company saw in finer detail. Geographically, emerging markets, where sales grew 20%, drove stronger sales than mature markets, which had only "mid-single-digits" percentage growth, he said.

As in the past quarter, consumer demand drove Windows market growth. But business purchasing, which has been slow in the past year, is starting to rebound as well. Business purchases of Windows grew 14% for this quarter.

Overall, revenue from small and midsized businesses increased 15% from a year earlier. The enterprise sector also started to show signs of life, as delayed PC refresh cycles started to kick in, though the sales remain sluggish there, Koefoed said.

Microsoft saw bright areas of growth in some of its other still-budding endeavors as well. On the virtualization front, System Center Server revenue grew more than 20%. Online advertising revenue grew by 19%, driven primarily by search. Bing has experienced "10 consecutive months of [market-]share gain in the U.S.," Koefoed said.

Microsoft sees momentum with its cloud services as well. In this quarter, the company's Azure cloud service went live, joining a number of other hosted versions of Microsoft applications. "We have more than 40 million paid seats of our commercial online services," Koefoed said, adding that the company has added some big names to its customer list, such as Starbucks and McDonalds.

"We intend to build on this momentum," he said.


Copyright © 2010 IDG Communications, Inc.

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