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Microsoft Earnings: Revenue, Profits Up on Strength of Windows 7

Microsoft's (MSFT) recently-filed 10-Q suggestions that Windows 7 finally helped the company reverse its financial misfortunes from last quarter. Year-over-year revenue was up 14.4 percent to hit $19 billion. Combined with a $181 million drop in operating expenses, net income reached $6.7 billion -- a 60 percent jump over the last calendar quarter of 2008. Cash, cash equivalents, and short-term investments are at $36.1 billion.

Revenue was up in each division except online services, where the loss went from $378 million in the last quarter of 2008 to $478 million in 2009, and in the entertainment and devices division. Here's a snapshot, only it's important to remember that given Microsoft's accounting, the numbers don't really tell you how well individual divisions fared:

According to the 10-Q, here are the major factors that affected divisional performance:

  • Windows & Windows Live -- OEM sales represent 80 percent of this division's revenue, so the Microsoft-estimated 15 percent to 17 percent increase in PC sales last quarter helped float the division's boat. Sales of Windows 7 to businesses, emerging markets, and retail added the rest.
  • Server and Tools -- Product revenue increased by 3 percent but consulting services were down by 2 percent. Income increased largely through the combination of higher revenue and less spending in R&D, which is not necessarily good news for a technology company.
  • Online Services -- This is another way of saying online advertising. Revenue was down 11 percent because an increase in search revenue was more than offset by a decrease in display ad revenue. Here, too, Microsoft lowered R&D spending, but cost of revenue was up by 50 percent, largely because of higher online traffic acquisition costs.
  • Microsoft Business -- The division that handles the Office product lines saw a decreased revenue of 6 percent, "primarily reflecting a decline in licensing the 2007 Microsoft Office system to transactional business customers, offset in part by a 1% increase in Microsoft Dynamics revenue." That has to make you wonder whether online systems such as Google (GOOG) Apps and Zoho might be having more of an effect than the company would like.
  • Entertainment and Devices -- There was a 12 percent decline in Xbox 360 platform and PC game revenue because of decreasing volumes of games and consoles and decreasing revenue per console. One factor that the company noted was the lack of a big hit game to help drive demand. Also, selling 5.2 million consoles in 2009 versus 6 million in 2008 didn't help. This is another division where R&D spending was down.
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