Microsoft Posts Strong Revenues on Kinect, Windows 7

Microsoft posted strong quarterly revenues off sales of Kinect and other products, but faces challenges in online services. Net income totaled $6.63 billion.

Numberswise, Microsoft's latest quarterly earnings suggest a lot of upside for the company, with a stronger-than-expected $19.95 billion in revenue and $6.63 billion in net income. However, many of its latest and most high-profile initiatives-including Windows Phone 7 and cloud software-have yet to pay the same sort of real-world dividends as traditional products such as Windows 7 and Office 2010.

Net income fell slightly year over year, from $6.66 billion for the same quarter in 2009.

Microsoft reported positive news in a number of diverse segments. For the three months ended Dec. 31, its Business Division revenue grew 24 percent year over year. In addition, some 8 million Kinect units apparently sold in the hands-free controller's first 60 days of release, giving the company a solid win on the consumer side of the equation and helping boost revenues for its Entertainment and Devices Division.

Peter Klein, Microsoft's chief financial officer, told analysts and media listening on a Jan. 27 earnings call that Kinect is "our opportunity to fundamentally change how people interact with technology." Certainly, it represents the fruits of Microsoft's research into natural user interface and related technology areas.

Microsoft's flagship products also continued to sell well. It reported more than 300 million Windows 7 licenses sold since the operating system's October 2009 release. Office 2010 licenses shipped at a steady rate, outpacing Office 2007 sales over an equivalent period by 50 percent. Klein claimed during the earnings call that some 90 percent of enterprises worldwide had started their migration to Windows 7.

As announced at January's Consumer Electronics Show, the next version of Windows will support system-on-a-chip (SoC) architecture, in particular ARM-based systems. Windows currently dominates the x86 platform leveraged by traditional PCs, but the rise of mobile devices that leverage ARM architecture-in particular, tablets and smartphones-offers both a potential threat and market channel for Windows software.

But the company took significant financial hits in other areas. Its Online Services Division, for example, suffered operating losses of $543 million for the quarter, a significant downtick from the $463 million burnt during the same quarter in 2009. With total losses of $1.1 billion for the six months ended Dec. 31, Microsoft is clearly willing to pay to keep its Bing search engine in the game against Google. A recent alliance with Facebook, increasingly a Google opponent, could help Microsoft gain some traction in this area.

Despite claiming "strong" interest from businesses in its "all in" cloud strategy, Microsoft also has yet to see substantial profits for initiatives such as Azure. Over the next few quarters, the company will release cloud-based products, including Office 365, designed to fit a variety of business needs-but it also faces competition in the area from the likes of Google and, which have made no secret of their intentions of seize large chunks of the enterprise-spending pie.

Microsoft's Server and Tools Business-in many ways the epicenter of its cloud strategy-is primed to undergo a shakeup this year with the departure of longtime division President Bob Muglia. "While Windows and Office are household words, our Server and Tools business has quietly and steadily grown to be the unquestioned leader in server computing," Microsoft CEO Steve Ballmer wrote in a Jan. 10 e-mail to employees announcing Muglia's removal. "We are now ready to build on our success and move forward into the era of cloud computing."

Microsoft executives on the earnings call declined to mention how many Windows Phone 7 devices had sold to consumers. "We're pleased with the initial response," Klein said. "While we are encouraged by the early progress, we realize we have a lot of work ahead of us."

Microsoft reconfirmed that some 2 million Windows Phone units have been shipped by manufacturers to retailers. A software update is being prepped for release within the next few weeks, which will tweak application speed and add a missing cut-and-paste feature. Klein reiterated the company's argument that consumers are responding positively to the platform.