Microsoft Earnings: A Record Quarter, But Revenue Is Still Vulnerable

Microsoft (MSFT) proved that it could bring in one heck of a quarter, including year-over-year 25 percent increase in revenue and 51 percent jump in net income. Part of that was due to a one-time revenue deferral last year of $1.47 billion. But even taking that into account, revenue growth was 13 percent and net income was up 16 percent.

Of course, the comparisons to Apple (AAPL) are impossible to ignore. The little company that Steve Jobs built had net revenue in its most recent quarter of $20.34 billion, which was 66.7 percent growth, versus Microsoft's $16.195 billion. However, Apple's net income of $4.308 billion was still significantly lower than Microsoft's $5.410 billion. Much of that is due to the inherent difference in their business models. Apple makes its big money from integrated software and hardware systems. Microsoft's bailiwick is largely software, which generally has far higher margins because the costs of goods for products is so low.

As for where Microsoft made the big jump in money, here is the segment breakout:

Furthermore, Server and Tools was up only 11.5 percent. Again, good, but not the sort of growth that will carry the company as sales of Windows client eventually slow. Online Services, which would include Bing, was up 7.6 percent. In the Entertainment and Devices division, the company bragged that "Xbox 360 consoles grew 38%, outselling every competing console in the U.S. for each of the past four months." However, revenue increase year over year by only 27.1 percent, so growth comes as a result of cutting prices and the operating income of $382 million was only 5.4 percent of Microsoft's total $7.116 billion. Certainly nothing to sneeze at, but clearly nothing that will buoy the company if older revenue lines begin to droop and if Windows Phone 7 sales don't take off the way Microsoft has hoped they would.

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