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Microsoft Credits Server Sales for Income Gain in Q1

Microsoft's net income rose 11 percent on strong sales in its server and tools business unit for the quarter ended Sept. 30, the company said Thursday. Company revenues grew 12 percent overall, while the server and tools business grew 19 percent.

Net income for the quarter was $2.9 billion and diluted earnings per share hit 27 cents, 2 cents over Microsoft's guidance and better than analysts had expected.

Revenues for the quarter hit $9.19 billion, compared to $8.22 billion for the comparable year-ago quarter. In keeping with a companywide initiative to cut expenses out of the budget this year, Microsoft managed to keep its cost of revenues roughly flat at around $1.5 billion.

Microsoft chief financial officer John Connors said the company saw growth in commercial and consumer businesses. "This quarter we had a very healthy commercial server and desktop business driving double-digit revenue growth, and we expect to continue the trend of growing revenue faster than expenses as we work to make each of our businesses more efficient and profitable," Connors said in a statement.

In its earnings release, Microsoft highlighted the growth in server and tools revenues. Led by the flagship products -- Windows Server, SQL Server and Exchange Server -- the server and tools revenues were up over the year-ago quarter by 19 percent to $2.23 billion. But management server products, such as Microsoft Operations Manager and Systems Management Server, matched the flagship servers in growth rate with an increase in revenues of 20 percent.

"We estimate that overall server hardware shipments grew 16 percent in the first three months of fiscal 2005 compared to the prior year. Server and Tools revenue increase was driven by an estimated 18 percent increase in Windows-based server shipments resulting in 19 percent growth in new Windows Server license units as well as growth in SQL Server, Exchange Server and Core CAL revenue," the company said in an addendum to its earnings statement.

Client revenues grew 7 percent to $2.99 billion on the strength of the overall PC market, which Microsoft estimates grew at 10 percent for the quarter. That growth exceeded Microsoft's expectations for PC growth of about 6 percent to 8 percent.

Microsoft got revenue growth out of all seven of its business segments for the quarter. Money-making business segments were client ($2.4 billion), server and tools ($701 million), information worker ($1.9 billion) and MSN ($77 million). Money losers were Microsoft Business Solutions ($41 million), mobile and embedded devices ($20 million) and home and entertainment ($142 million). All three money-losing segments lost less than they did in the year-ago quarter.

About the Author

Scott Bekker is editor in chief of Redmond Channel Partner magazine.

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