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

Last Updated Oct 28, 2010 5:44 PM EDT

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:

Three Months Ended

September 30,

2010

2009

Revenue

Windows & Windows Live Division

$ 4,785

$ 2,880

Server and Tools

3,959

3,550

Online Services Division

527

487

Microsoft Business Division

5,126

4,514

Entertainment and Devices Division

1,795

1,412

Unallocated and other

3

77

Consolidated

$ 16,195

$ 12,920

Operating income (loss)

Windows & Windows Live Division

$ 3,323

$ 1,483

Server and Tools

1,630

1,237

Online Services Division

(560)

(477)

Microsoft Business Division

3,388

2,827

Entertainment and Devices Division

382

260

Corporate-level activity

(1,047)

(848)

Consolidated

$ 7,116

$ 4,482

This is both good and bad news for Microsoft. The growth in Windows 7 sales clearly had a big impact, with 66.1 percent revenue growth in the Windows & Windows Live division. Revenue for the Microsoft Business division, which would include the sales of Office 2010, were up 13.6 percent: strong enough, but hardly a killer increase. It suggests that, given pressure from Google's (GOOG) online applications and the already extensive capabilities of earlier editions, the days of Microsoft Office continuing as a major cash cow for the company have begun their (probably long) wind down.

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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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.