Microsoft Posts Strong Revenue, But Cloud Services Still a Question

By Nicholas Kolakowski  |  Posted 2011-10-20 Print this article Print

Microsoft posted strong quarterly numbers on sales of business software and Windows, but cloud and online services aren't yet major revenue drivers.

For its first fiscal quarter of 2012, Microsoft reported strong sales of traditional software such as Windows and Office. But its online services, which the company is betting will eventually help supplant traditional software as a major revenue driver, remain a relatively small part of the overall revenue scheme.  

Overall, Microsoft reported revenue of $17.37 billion for the quarter ended Sept. 30, a year-over-year increase of 7 percent. Operating income, net income, and diluted earnings per share all rose. Several Microsoft divisions reported strong revenue, including its Business Division, which experienced an 8 percent increase from the year-ago quarter, to $5.62 billion. Server & Tools segment revenue increased 10 percent year-over-year, to $4.25 billion.

During an Oct. 20 earnings call, Bill Koefoed, Microsoft's general manager of investor relations, categorized the company as "thrilled" with the progress of Office 365, Microsoft's cloud-productivity platform, but declined to break out specific subscriber numbers.

He alluded to "monetization challenges" for aspects of Microsoft's Online Services division, although overall revenue grew 19 percent. Quarterly losses for the division totaled $494 million. Microsoft is depending on the data from its Bing search engine to help inform and refine the rest of its cloud services.  

Growing market share and managing expenses are the keys to eventually turning online services toward profitability, Microsoft executives said during the earnings call. Microsoft is working closely with Yahoo, with which it has a deep search-and-advertising partnership, to make that happen.

Although Microsoft was built on sales of traditional software such as Windows, its executives have lately embraced an "all-in" cloud strategy, centered largely on subscription-based services to businesses large and small. Microsoft is also pushing the cloud in the consumer realm, notably in products such as Windows Phone, which is receiving a broad-based Mango update with some 500 new tweaks and features.

Speaking of Windows, Microsoft also reported Windows and Windows Live revenue of $4.87 billion, a 2 percent increase from the prior-year period. Last quarter, softening PC sales had forced the division into a 1 percent decline. More than 450 million Windows 7 licenses have sold to date. Over the past few months, Microsoft has offered several glimpses of the next version of Windows, code named Windows 8, which will feature radical changes to its user interface.

Koefoed estimated that the overall PC market grew between 1 percent and 3 percent during the quarter, overcoming a weakness in netbook sales. "We have seen the cannibalization of netbooks," he said, adding that Windows sales on traditional notebooks had risen 14 percent.

Microsoft recently completed its acquisition of Skype, forming the communications company into a new division headed by former CEO Tony Bates. Skype software will eventually find its way into a host of Microsoft products.   

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Nicholas Kolakowski is a staff editor at eWEEK, covering Microsoft and other companies in the enterprise space, as well as evolving technology such as tablet PCs. His work has appeared in The Washington Post, Playboy, WebMD, AARP the Magazine, AutoWeek, Washington City Paper, Trader Monthly, and Private Air. He lives in Brooklyn, New York.

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