Besides Windows, other trouble spots at Microsoft

Server and tools division is the lone bright spot

Windows Vista and XP may shoulder most of the blame for Microsoft Corp.'s mediocre second-quarter results announced today, but few of the software maker's divisions were shining beacons.

Revenue from its Windows client division fell 8% because of delayed corporate upgrades of PCs and cannibalization of consumer notebook sales by netbooks installed with Windows XP.

"This quarter's report emphasizes how dependent Microsoft really is on PC sales, despite all its efforts to diversify into new businesses," said Matt Rosoff, an analyst at independent Directions on Microsoft. "The company must continue to diversify in order to remain strong for the long term."

Problem was, other Microsoft groups were hammered either by a drop in sales or a failure to rein in expenses.

The normally reliable Microsoft business division, for example, was hurt by weak PC sales. Profits from the division, which sells the profit machine known as Microsoft Office, fell 1%, dragged down by a $224 million decrease in consumer sales. The sales drop was primarily due to fewer PCs shipping with copies of Microsoft Office 2007, according to Microsoft's 10-Q filing with the Securities and Exchange Commission today.

A $100 million drop in the sale of Zune devices contributed to a 60% decrease in the entertainment and devices division's operating income, to $151 million. Strong sales of Xbox 360 consoles, however, helped lift revenue 3% to $3.18 billion.

Microsoft's weakest financial performer was its online services business, which continued its money-losing ways. Revenue from Web advertising and subscriptions to services such as Windows Live Hotmail was flat at $866 million in the second quarter, while the loss nearly doubled (91%) to $471 million.

The loss widened in part because of a $137 million increase in cost of revenue, as Microsoft made payouts to users who tried its Live Search site, which competes with Google Inc.'s search.

Former Yahoo Inc. executive Qi Lu took over this month as the new head of the online group.

Microsoft's lone bright spot was its server and tools division, where sales were up 15% year over year to $3.74 billion.

The unit, which includes enterprise software products Windows Server and SQL Server, is headed by longtime Microsoft executive Bob Muglia, who was recently promoted to president.

Microsoft still reported profits and revenues that would be the envy of almost any tech firm, especially in these economic times. Its operating profit was $5.94 billion on total revenue of $16.63 billion. Revenue was up 2% year over year, while operating income was down 8%.

The company is still reining in expenses, however, by trimming its 96,000 head count by 2,000 to 3,000 over the next 18 months, including 1,400 layoffs announced today.

Copyright © 2009 IDG Communications, Inc.

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