Microsoft Sees Revenue Growth on Server and Tools as Xbox Drops

By Darryl K. Taft  |  Posted 2012-04-20

Microsoft Sees Revenue Growth on Server and Tools as Xbox Drops

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."

Microsoft Claims Road Map, Vision Are Driving Customer Wins


On a call with analysts, Klein added, "On the infrastructure side, the Server & Tools Business delivered double-digit revenue growth, with SQL Server leading the way. We've now launched System Center 2012 and SQL Server 2012, and the new versions of Windows Server and Visual Studio are on the horizon. Our product road map and vision are driving new customer wins and strong Enterprise Agreement renewals. We are confident that we are uniquely positioned to address the needs of CIOs as they strive to efficiently manage private and public clouds."

The Microsoft Online Services Division reported revenue of $707 million, a 6 percent increase from the prior-year period.

However, Microsoft's Entertainment & Devices Division posted revenue of $1.62 billion, a decrease of 16 percent from the prior period due to a soft gaming console market. Despite the drop, Xbox remained the top-selling console in the United States for the 15th consecutive month, and the company announced new television content partners and experiences for its 40 million Xbox LIVE members.

"In gaming and entertainment, while industry console sales were softer than our expectations, we continue to maintain our shared leadership position," Klein told analysts. "With Xbox LIVE, we are adding more content and partners as we expand the entertainment experience and build on our leading position in the living room."

Krans said 2012 marks an important year for Microsoft in terms of transitioning core lines of business to mirror current IT trends in cloud and flexible IT consumption.

"After successfully launching Office 365 in 2011, Microsoft will look to replicate this early success with product deployments in other core business groups, including Server and Tools, Business, and Windows Division," he said. "The launch of SQL Server 2012 and Systems Center 2012 during 1Q12 and the anticipated launch of Windows 8 in early 2012 and Office 15 in late 2012 will write the script for how Microsoft's business performs beyond 2012."

Moreover, TBR reported:

"Microsoft will build off its broad install base on PCs in the enterprise market, as tablets and mobile phones have yet to catch on as the primary device for work (and may never will). The point of focus for Microsoft's long-term success of Windows in both the consumer and enterprise markets will be capturing adoption in the consumer space. With PC shipments declining in the consumer space, the adoption of Windows 8 tablets and mobile devices is crucial to the long-term success of Windows in the consumer market. The mobile OS space, a market that Windows has yet to capture, is already heavily saturated by the Android and iOS platforms. For Microsoft, the ability to capture adoption from both the developer and end-user sides of spectrum and demonstrate the flexibility of Windows 8 across both PCs and mobile devices will be the make or break point for Windows 8 in the consumer space."



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