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By Joe Wilcox, Betanews

Recovering IT spending, robust worldwide PC shipments and strong Windows 7 adoption helped Microsoft to beat the Street. The software giant announced fiscal 2010 third quarter earnings, ended March 31, after the Bell, today.

Microsoft revenue rose 6 percent to $14.5 billion, up from $13.65 billion a year earlier. Operating income: $5.17 billion, up 17 percent. Net income: $4.01 billion, or 45 cents a share. Net income rose by 35 percent and earnings per share by 36 percent year over year. If not for a $305 million deferral related to Office 2010, Microsoft would have reported $14.81 billion revenue.

For about a year, Microsoft provided no guidance to Wall Street analysts, so there was none for fiscal Q3. Analysts’ average consensus was $14.38 billion revenue and 42 cents earnings per share. Revenue estimates ranged from $13.81 billion to $14.75 billion.

“Business customers are beginning to refresh their desktops and the momentum of Windows 7 continues to be strong,” Kevin Turner, Microsoft’s chief operating officer, said in a statement. “We are also seeing tremendous interest in our market-leading cloud services for business.”

Microsoft closed the quarter with $12.3 billion unearned revenue. Annuity license sales grew in the low single digits. The company reported 40 million paid seats for Azure cloud services. During a conference call late this afternoon, Peter Klein, Microsoft’s chief financial officer, predicted “continued strength in hardware shipments,” which would be good for operating system and productivity suite sales. He asserted that across divisions annuity revenue would align with OEM revenue. Klein also emphasized that fiscal fourth quarter is the “season high for our enterprise sales.”

Coming into the quarter, some analysts and armchair pundits started looking more closely at Apple compared to Microsoft. Unthinkable a year ago, Apple has closed a huge earnings and revenue gap separating it from Microsoft. On Tuesday, Apple announced fiscal 2010 second quarter results: $13.5 billion revenue and net profit of $3.07 billion, or $3.33 a share. In the year ago quarter, Microsoft reported $4.4 billion operating income, $2.98 billion net income or 33 cents a share. Apple: $9.08 billion revenue and $1.62 billion net income or $1.79 earnings per share. Apple made enormous revenue and earnings gains against Microsoft in just one year. The question now isn’t so much if Apple might catch or surpass Microsoft but when.

Q2 2010 Revenue by Division

• Windows & Windows Live: $4.2 billion, up 28 percent from $3.5 billion a year earlier.
• Server & Tools: $3.58 billion, up 2 percent from $3.5 billion a year earlier.
• Business: $4.24 billion, down 6 percent from $4.5 billion a year earlier.
• Online Services Business: $56 million, up 12 percent from $50 million a year earlier.
• Entertainment & Devices: $1.66 billion, up 2 percent from $1.62 billion a year earlier.

Still, Office and Windows are cash machines, which are getting a boost from recovering PC sales. The really good news came about a week ago from Gartner and IDC, which reported strong double-digit growth in second-quarter worldwide PC shipments. But that wasn’t the big takeaway, particularly for Microsoft. After more than 18 months of sluggish sales, businesses are finally beginning to buy PCs again. For Microsoft, the news likely means an increase in sales of higher-margin professional Windows, which is evident in fiscal Q3 numbers. During the worst of the global economic crisis and the 2008-09 surge in netbook shipments, the sales percentage dramatically shifted to lower-margin consumer Windows.

By Microsoft estimates, worldwide PC shipments grew by 25 percent to 27 percent, which is inline with numbers from both Gartner and IDC. Netbooks, which typically ship with non-Premium Windows, accounted for 10 percent of shipments. according to Microsoft.

“With a relatively positive macroeconomic outlook, business demand was more forthcoming,” Mikako Kitagawa, Gartner principal analyst, said in a statement. “Major PC replacement demand driven by Windows 7 will become more apparent in the second half of 2010 and the beginning of 2011.” That’s exactly the kind of forecast Microsoft executives want to hear.

But that’s the future. The business recovery is still modest compared to consumer sales. In the United States, business PC shipments grew by 10 percent year over year compared to 30 percent for consumers, according to Gartner. There Windows 7, along with aggressive pricing, contributed to unseasonably strong shipments. “Although the first quarter is not typically a strong quarter for the consumer market, growth in the consumer segment was strong,” Kitagawa said in the statement. “The positive economic outlook and affordable system prices drove US consumers to buy more PCs. These purchases either replaced aging PCs or became additions to buyers’ households.”

Q2 2010 Income by Division

• Windows & Windows Live: $3.06 billion, up 35 percent from $2.27 billion a year earlier.
• Server & Tools: $1.26 billion, up 3 percent from $1.22 billion a year earlier.
• Business: $2.6 billion, down 6 percent from $2.8 billion a year earlier.
• Online Services Business: Loss of $713 million, up 73 percent from $411 million loss a year earlier.
• Entertainment & Devices: $165 million, flat from a $41 million loss a year earlier.

Segment by Segment Results

Microsoft reports revenue and earnings results for five divisons: Windows & Windows Live, Server & Tools, Business, Online Services and Entertainment & Devices.

Windows & Windows Live. Revenue rose 29 percent year over year, or by $781 million. The division derives about 80 percent of its Windows revenue from license sales to PC OEMs. OEM license sales increased by 30 percent. OEM premium license mix was 72 percent — 44 percent consumer and 28 percent business. Consumer license sales increased by 35 percent year over year and business licenses by 15 percent.

Server & Tools. The division is most insulated against economic maladies, because about 50 percent of revenues come from contractual volume-licensing agreements. Product revenue grew 2 percent, or $50 million, buoyed by Windows Server and Enterprise Client-Access License sales. Because of corporate layoffs, Microsoft has seen customers renewing license contracts at lower levels. Annuity license sales were flat year over year, which is somewhat surprising with new products in the pipeline. The division’s services revenue grew by 5 percent, or $34 million. Microsoft put year-over-year server hardware shipment growth in the high teens.

Business. Microsoft’s other cash cow division reported yet another quarter of revenue declined. Two mitigating factors: 1) A 1 percent decline, or $37 million, in Office 2007 licensing. 2) Deferral of $305 million related to Office 2010 upgrade guarantees. Annuity licensing was flat year over year. However, Microsoft is launching Office 2010 this quarter, which should positively affect Office sales. Incidentally, Office consumer revenue rose 11 percent, or $77 million, buoyed by strong PC shipments.

Online Services Business. The division’s loss widened, despite ad sales increases. Online advertising revenue rose 19 percent, or by $81 million, to $502 million. Much of the ad sales increases came from search gains.

Entertainment & Devices. Microsoft shipped 1.5 million Xbox consoles during the quarter, down 12 percent from 1.7 million a year earlier. Non-gaming revenue increased by 14 percent, or $77 million, driven by sales of PC hardware and Windows embedded devices.

Copyright Betanews, Inc. 2010

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Dell Lightning: the ultimate Windows Phone 7 device leaks out originally appeared on Engadget on Wed, 21 Apr 2010 23:55:00 EST. Please see our terms for use of feeds.

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HP stuffs Core i3 / i5 into TouchSmart PCs, gently revamps other desktops originally appeared on Engadget on Wed, 21 Apr 2010 01:16:00 EST. Please see our terms for use of feeds.

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