Microsoft Sees Revenue Growth on Server and Tools as Xbox Drops

Microsoft reported a 6 percent boost in revenue for its fiscal third quarter of 2012, amidst a dip in net income and a poor showing for its Xbox business.

Microsoft announced quarterly revenue of $17.41 billion for the quarter ended March 31, 2012, a 6 percent increase from the prior year period.

However, net income slipped 2.4 percent for the quarter, as the same quarter in 2011 enjoyed the boost of a tax settlement with the U.S. Internal Revenue Service that raised profits. Net income for the quarter was $5.11 billion, compared with $5.23 billion in the prior-year period.

"We're driving toward exciting launches across the entire company, while delivering strong financial results," said Steve Ballmer, Microsoft's CEO, in a statement. "With the upcoming release of new Windows 8 PCs and tablets, the next version of Office, and a wide array of products and services for the enterprise and consumers, we will be delivering exceptional value to all our customers in the year ahead."

Microsoft's Server & Tools business posted $4.57 billion in third-quarter revenue, a 14 percent increase from the prior-year period, driven by double-digit revenue growth in SQL Server and more than 20 percent growth in System Center revenue.

The Microsoft Business Division reported $5.81 billion in third-quarter revenue, a 9 percent increase from the prior-year period, reflecting the continued strength of Office 2010 with businesses and consumers. Dynamics posted an 11 percent revenue increase from the prior-year period, with Dynamics CRM revenue growing more than 30 percent.

"Microsoft started 2012 the way it ended 2011, with Server and Tools and Business Division businesses accelerating, and Windows Division recording another quarter of incremental revenue growth from a year ago," said Allan Krans, an analyst with Technology Business Research (TBR), in a report on the software giant's fiscal Q3 2012 earnings. "Average PC shipment declines through the latter half of 2011 and beginning of 2012, coupled with Windows 7 peaking in deployments, continue to hinder consistent performance from the Windows business. Microsoft's Servers and Tools and Business Divisions recorded the highest yearly growth during the quarter, at 14.1 percent and 9.1 percent, respectively. Business, Windows and Server and Tools Divisions were once again the largest contributors to Microsoft's $17.4 billion in revenue during 1Q12. Microsoft's ability to refresh core products to cater to customer needs in cloud and flexible IT will determine the growth trajectory for these core businesses moving forward."

Moreover, Microsoft's Windows and Windows Live Division posted revenue of $4.62 billion, a 4 percent increase from the prior-year period. Strong Windows 7 adoption continued, with enterprise desktops on Windows 7 now up to 40 percent worldwide, the company said.

TBR's Krans said:

"Microsoft's Windows business is not in jeopardy of fading into the sunset in 2012, as a broad install-base and the continued use of Windows 7 on PCs in businesses worldwide continue to make Windows one of the most profitable businesses for the company (63.8 percent operating margin in 1Q12, behind only the Business Division at 64.8 percent operating margin). With that said, the successful launch of Windows 8 across mobile devices and tablets in 2012 will ensure sustained growth in both the consumer and enterprise markets."

"We saw strong demand for our business desktop and infrastructure offerings," said Peter Klein, chief financial officer at Microsoft, in a statement. "Solid revenue growth and continued cost discipline drove double-digit operating income growth."