News

Microsoft Q3 Earnings Up, but Entertainment Division Disappoints

• By Kurt Mackie
• 04/19/2012

Microsoft reported positive third-quarter financial earnings results today for its fiscal-year 2012, with the exception of its Entertainment and Devices Division.

The company pulled in $17.4 billion in revenue for the quarter, which ended on March 31, 2012. That's up 6% compared with last year's fiscal third quarter. Net income for the quarter was $5.1 billion. Diluted earnings per share was $0.61, exceeding the $0.58 estimate.

Loss Leaders
Revenue was up across four of Microsoft's five divisions. The Entertainment and Devices Division faltered, bringing in $1.6 billion, down 16% in comparison with the previous year's third-quarter revenue result. Peter Klein, Microsoft's chief financial officer, described the gaming console market as "soft," even though Microsoft's Xbox remained as the leading console seller in the U.S. market over a 15-month period.

In response to a question on the earnings call about future growth prospects in the Entertainment and Devices Division, Klein said that Microsoft feels good about its market position and strategy with Xbox and Kinect. He pointed to the Xbox Live subscriber model as a growth area, as people are spending more time on entertainment vs. gaming.

No one asked about Microsoft's Windows Phone performance during the earnings call, and Microsoft provided nothing of substance.

Microsoft's Online Services Division delivered $707 million for the quarter, up 6% from the prior year's quarter. This division is the usual whipping boy for Microsoft each quarter because of the company's associated operating-expense losses in trying to bolster its search business, chasing Google's No. 1 position. Nonetheless, Microsoft managed to reduce the usual loss of the division in this third quarter by $300 million. No explanation for that change was given. Klein said that Microsoft is continuing to push to increase its Bing search share volume, as well as its "RPS" (revenue per search) growth in search advertising.

"We view search as strategic asset across the company," Klein said, adding that Microsoft's strategy "has evolved" and that the search asset is now considered "even more powerful" than Microsoft had originally anticipated.

The Big Earners
Other divisions rolled in positive earnings for the quarter. At the top in terms of revenue was the Microsoft Business Division. It delivered $5.8 billion, up 9% over the previous year's Q3 result. Microsoft Office was a key factor in this division's revenue growth, as well as Dynamics (11% revenue growth quarter over quarter), particularly on the Dynamics CRM side, which grew over 30% in the quarter.

The next leading division was the Windows and Windows Live Division. It brought in $4.6 billion in revenue, up 4% compared with the prior Q3 period. Windows 7 is now running on approximately 40% of PCs worldwide, Klein said. Microsoft tracked the revenue gains for this division more to business adoption of Windows as they refreshed their PC stocks as compared with consumer PC purchases.

"We estimate the worldwide PC market grew two to four percent this quarter," said Bill Koefoed, general manager of investor relations, on the earnings call. "Business PCs grew eight percent as businesses continued to upgrade their hardware and software to Windows 7. When excluding netbooks, consumer PCs grew six percent."

One of the financial analysts on the earnings call expressed skepticism about Microsoft's Windows revenue performance, saying that he expected PC sales to be "stale." However, Klein said the business PC adoption was consistent with themes Microsoft has been seeing. He added that emerging markets still represent the main growth area in PC purchasing.

The Server and Tools Division contributed $4.57 billion in third-quarter revenue, up 14% vs. Q3 revenue last year. Klein said that the quarter saw "double-digit" SQL Server revenue growth, plus a 20%-plus growth in revenue on the System Center side.

Licensing Gains
Koefoed noted that Microsoft's multiyear licensing agreements grew 40%. He also said that Microsoft recorded $15.2 billion in unearned revenue for the quarter, representing a 17% increase over last year's third-quarter result. Microsoft's unearned revenue category largely reflects licensing agreements that have been renewed by companies, so it tends to reflect corporate commitments to the Microsoft-stack product line.

Exchange and SharePoint grew double digits during the quarter, while Lync grew over 35%, according to Koefoed.

Koefoed also talked a little about Microsoft's Skype acquisition, saying that users have made over 100 billion calls over the Skype network, which represents an increase of 40% year over year.

To listen to Microsoft's Q3 earnings call on demand, go to the Microsoft investor relations page located here.