Microsoft Revenues Benefit from Windows 7, Business Spending

Microsoft posted revenues of $16.04 billion for its fiscal fourth quarter, surpassing analyst estimates. Revenue across its key divisions, including Windows and Online Services, also improved.

Heading into the earnings call, analysts had predicted Microsoft would post revenues of $15.2 billion. The stronger-than-expected revenues suggest that the economy—or at least the part of it with a need for software—is indeed on the mend after a long period of global recession. During the same quarter in 2009, facing plunging software sales and a freeze in business spending, Microsoft had reported revenues of $13.1 billion.

“We had strong demand and strong sales execution,” Microsoft Chief Financial Officer Peter Klein told analysts and media during a July 22 conference call. “We certainly feel good about the traction of our products.”

Buoyed by strong sales of Windows 7, Microsoft’s Windows division reported revenues of $4.5 billion, up from $3.2 billion during the same quarter last year. Since its October 2009 launch, Microsoft says, some 175 million Windows 7 licenses have been sold.

Revenue for the Business division, which recently launched Office 2010, experienced a year-over-year rise from $4.6 billion to $5.3 billion. Although revenue for the company’s Online Services division increased year-over-year from $501 million to $565 million, its quarterly losses steepened to $696 million.   

Microsoft’s advertising revenue climbed 19 percent year-over-year, to $494 million. The company hopes to have the major components of its online search-and-advertising deal with Yahoo, which involves porting Yahoo’s U.S. advertisers and publishers onto Microsoft’s AdCenter platform, in place by the end of 2010.

Microsoft’s general and administrative costs dipped slightly during the quarter, to $987 million. Since 2009, in an effort to slash costs, Microsoft has terminated a variety of legacy projects and cut more than 5,000 employees from its payroll.

Heading into the earnings call, analysts expected Microsoft to benefit from shipments of business software, which had proven anemic as both the enterprise and SMBs slashed IT budgets in an effort to weather the recent recession. For months, many of those same analysts predicted that a combination of aging IT infrastructure and pent-up demand for next-generation software would eventually translate into more robust sales.  

“We expect to see further evidence that an enterprise PC and server replacement cycle is upon us,” Katherine Egbert, an analyst with Jefferies & Co., wrote in a July 19 research note. “Recent reports by Intel and others indicate that the much-anticipated PC and server upgrade cycle has begun.”

But Microsoft is unlikely to see substantial revenue from projects outside of its core software properties, according to Egbert, at least in the short- to medium-term.  

“We think it’s too early to see a boost from Kinect (formerly Project Natal) units, which are slated to start shipping in early November,” Egbert wrote. “We don’t see Bing search or Azure cloud services add meaningfully, despite recent market share gains and customer wins.” Nor did Egbert expect to see any upside in revenue from Office 2010, “although a [fiscal year end] wave of volume license agreements that include Office 2010 could benefit unearned revenue.”

During the July 22 earnings call, Microsoft executives also seemed vague about the potential impact of tablet PCs on the overall tech market. Apple’s iPad has currently dominated the space, although other manufacturers are planning tablets running a variety of operating systems.

“We think tablets are very interesting,” Klein said. “Tablets I think are interesting and great because they enlarge the overall [PC] opportunity and remind us that there are lots of interesting scenarios that we continue to work on.”

During a July 12 keynote address at Microsoft’s Worldwide Partner Conference, CEO Steve Ballmer suggested that the company would continue to devote substantial resources to providing cloud-based services to businesses: “There’s no question that Microsoft has chosen to embrace that path together with all of you, and there’s no question that there’s more to do.”

Specifically, Microsoft is focused on providing what it calls “IT as a service,” offering Azure and other cloud-based products as a way for businesses to fulfill multiple functions. But with the cloud in many ways still in its relative infancy, and a significant percentage of businesses still unwilling to take their IT infrastructure off-premises, Microsoft still very much needs platforms such as Windows 7 to provide the lion’s share of its revenue.

“On the Azure side, it’s early,” Klein said during the earnings call. “It’s not material to the financials this year.”

Later in 2010, Microsoft will also face another challenge when it releases Windows Phone 7, its attempt at resetting its smartphone operating-system franchise. Apple recently announced quarterly revenues of $15.7 billion, largely on the strength of products such as the iPhone and iPad.