Microsoft's revenue and profits rocketed upwards in the first fiscal quarter of 2011, with revenues of $16.20 billion and net income of $5.41 billion, but one division's numbers are decidedly earthbound: Online Services, which reported a $560 million loss despite $527 million in revenue.
That represents a strong dip from the same quarter last year, when the division lost $477 million. The loss comes despite an increase in overall division revenue. It means, basically, that Microsoft is willing to burn through the equivalent of a small country's GDP to stay competitive with Google and other cloud-centric companies.
Some signs in Microsoft's online world are positive. In an Oct. 28 earnings call, executives reported a 13 percent increase in online advertising, and Bing continues to claim market share in the search arena. Microsoft's search-and-advertising deal with Yahoo, which involves Bing powering the latter's backend search, seems poised to pay dividends-although the scale of those dividends will only play out on future quarters' balance sheets.
Nor has Windows Azure, Microsoft's cloud-based developer platform, notched significant revenues. Taken along with the losses in Online Services, it could be a worrying sign for the company as it pursues an "all in" cloud strategy-except that Microsoft has also managed to gain customers to its cloud services, and seems intent on spending whatever necessary to increase its footprint in the arena.
That money for its continued cloud investment will likely come from sales of flagship products such as Windows 7 and Office 2010, which represent Microsoft's traditional business lines. The company reported 240 million Windows 7 licenses sold in the past year, and Office 2010 seems a solid seller-although not to the wildfire degree of the newest operating system.
At this week's Professional Developers Conference (PDC) 2010 in Redmond, Wash., Microsoft CEO Steve Ballmer highlighted Microsoft's overarching strategy for the cloud, while pleading with the gathered developers to jump aboard.
"Microsoft is combining the power and reach of the cloud with both Web and local device experiences," Ballmer wrote in an Oct. 28 statement. "There has never been a better time for developers to bet on Microsoft."
Analysts generally applauded Microsoft's overall revenues for the quarter. Some felt duty-bound to defend the company's robust performance in its traditional product lines, and more anemic results in other areas, as emblematic of its very particular corporate makeup.
"We have to take Microsoft results in their context. Their product lines are mature and despite the headwinds, Microsoft did well in the things they can control," Trip Chowdhry, an analyst with Global Equities Research, wrote in Oct. 28 comments printed on Reuters. "It is what it is. Microsoft is not Salesforce.com or Apple or Google. Expecting them to grow like Google does or like Salesforce.com is plain foolish."
Other analysts, however, focused on how Microsoft needs to continue to think ahead-and perhaps in a more cloud- and mobile-centric direction-if it wants to stay relevant.
"Windows is still doing well, Office is doing well and servers and tools are doing well," Toan Tran, an analyst with Morningstar, wrote in that same Reuters piece. However, the company "missed out on a lot of things. They missed out on search, on mobile."
As a result, Tran suggests, "Even though Microsoft is racking up these great quarters, investors are looking toward the future and saying Microsoft missed out on these big opportunities, and their business could be disrupted."
In any case, Microsoft seems determined to keep burning through millions in order to keep its online presence, and invest both funds and mind-share in Azure, in order to capitalize on what it sees as a very cloudy future.