Office, Xbox Kinect Boost Microsoft Bottom Line, Windows Weakens

Microsoft reported revenue buoyed by strong sales of Office 2010 and Xbox Kinect, although softness in the PC market affected sales of Windows.

Microsoft's quarterly earnings rose on solid sales of Office 2010 and the Xbox Kinect hands-free controller, despite some reported softness in PC sales during the period.

Microsoft's third-quarter revenue hit $16.43 billion, a year-over-year increase of 13 percent. Net income rose 31 percent, to $5.23 billion. Revenue for the company's Business Division, which produces Office 2010, rose 21 percent year-over-year, while the Entertainment & Devices Division, responsible for the Xbox 360 and Kinect, reported a 60 percent year-over-year rise.

Servers & Tools revenue rose 11 percent year-over-year, and Online Services Division revenue marked a 14 percent rise, driven by increases in search revenue. However, Bill Koefoed, Microsoft's general manager of investor relations, cautioned on the April 28 earnings call that "expected monetization" of the Yahoo search-and-advertising agreement is "taking longer than expected" and that "international integration efforts" had been delayed as a result. Under the terms of that agreement, Microsoft's Bing powers Yahoo's backend search, while Yahoo takes over a substantial portion of the two companies' advertising sales force duties.

Despite Windows 7 having sold 350 million licenses since its October 2009 launch, Microsoft's Windows segment reported a 4 percent dip, something Microsoft explained in a statement ahead of the earnings call as "in line with the PC trends."

According to a recent IDC report, a "cautious business mentality and waning consumer enthusiasm" combined with "a spike in fuel and commodity prices and disruptions in Japan" caused a 3.2 percent contraction in global PC shipments during the first quarter of 2011. Given the sheer number of those machines running Windows, it stands to reason the operating system would take a hit alongside hardware.

That being said, Microsoft chief financial officer Peter Klein suggested to media and analysts listening to the earnings call that enterprise deployments of Windows 7 had more than doubled "over the past six months." Sales of business PCs also apparently remained strong, but Microsoft's own numbers apparently place the PC market's quarterly decline at between 1 and 3 percent.

While Microsoft's traditional product lines, including Office and Windows, continue to drive the lion's share of overall revenue, the company's "all in" focus on cloud computing inevitably draws attention to the profitability of new and upcoming projects such as the cloud-based Office 365. There are also persistent questions about Microsoft's performance in the smartphone arena, where its Windows Phone 7 line of devices hopes to carve out some market-share from Google Android, Apple's iOS and RIM's BlackBerry franchise. In the latter case, Nokia's recent embrace of Windows Phone 7 for its upcoming smartphones is widely seen as a move that could potentially alter the mobile market in Microsoft's favor, although the extent of such benefits remains unclear.

On the earnings call, Microsoft offered no additional information about Windows Phone 7's actual sales to consumers.