Stay on top of the latest tech news with our free IT News Digest newsletter, delivered each weekday.
Automatically sign up today!


Ina Fried


Amid strong PC demand from consumers and businesses, Microsoft on Thursday reported quarterly revenue and earnings that topped the company’s expectations.

The Redmond, Wash.-based company said it earned $2.9 billion, or 27 cents per share, on revenue of $9.19 billion for the three months ended Sept. 30. That compares with earnings of $2.6 billion, or 24 cents per share, on revenue of $8.22 billion in the same quarter a year ago.

In July, Microsoft forecast revenue of $8.9 billion to $9 billion, with earnings per share of 25 cents, including about 5 cents per share in stock-based compensation expenses. Microsoft said Thursday that its per-share earnings included 5 cents worth of compensation-related charges.

“We’ve had a strong beginning to what we expect will be a very good year with continued growth in both our commercial and consumer businesses,” Microsoft CFO John Connors said in a statement. “This quarter, we had a very healthy commercial server and desktop business driving double-digit revenue growth, and we expect to continue the trend of growing revenue faster than expenses as we work to make each of our businesses more efficient and profitable.”

However, for the current quarter, which ends in December, Microsoft forecast revenue in the range of $10.3 billion to $10.5 billion. That’s below the First Call consensus estimate of $10.7 billion. Microsoft said it expects earnings per share to be 28 cents, including stock-based compensation expenses.

The company did raise its expectations for the full fiscal year, which ends in June. Microsoft said it now expects revenue of between $38.9 billion and $39.2 billion, with per-share earnings of $1.07 and $1.09, including compensation charges. In July, Microsoft had predicted revenue of between $38.4 billion and $38.8 billion and earnings per share of between $1.05 and $1.08.

Microsoft ended the quarter with $64.4 billion in cash and short-term investments, compared with $60.6 billion at the end of June. However, the company expects that figure to drop because it has a one-time payout of $3 per share slated for later this year, pending shareholder approval of changes to compensate Microsoft employees for the payout.

The company also expects to boost its stock repurchases in the coming months, though it actually spent less buying back shares last quarter than it did a year ago. The company said it spent $355 million on stock repurchases last quarter, compared with $1.05 billion in the same quarter a year earlier.

The company’s balance of unearned revenue–a highly watched indicator for future sales–dropped to $7.78 billion, a slightly larger decline than the company had predicted. The figure was down about $340 million from the $8.18 billion recorded a quarter earlier. Microsoft had predicted a drop of $200 million to $300 million.

On a conference call with analysts, Microsoft executives said the company is seeing customers taking longer to renew software contracts, typically taking more advantage of a 90-day grace period than they have in the past.

“They clearly do use the renewal period to hold out for discounting,” Connors said, but added that the company is not seeing any “unnatural” discounting patterns nor are they giving different guidelines to the sales force than in the past.

While renewals of so-called Enterprise Agreements are taking longer, Microsoft said it is still seeing its typical renewal rates of 65 percent to 70 percent and the deals typically include more types of software than the agreements they replace.

“As we go to renew, we absolutely want to attach a lot more server (and other) software,” Connors said. “That absolutely does take longer. We’re fine doing that to get (higher) attach rates.”

Although most of its contract deals continue to be for two or three years, Connors said the company is seeing some demand for even longer-term deals, especially by governments. Such contracts take longer to iron out, but typically involve more Microsoft products.

As it typically does, Microsoft also gave its forecast for the PC market, reiterating its expectation for slower growth in the coming year. The company said it expects 8 percent to 10 percent growth for its fiscal year, which ends in June, with business PC growth continuing to outpace that of consumer machines. On the server side, the company said it also things unchanged from July with an expectation of 13 percent to 15 percent growth.

As in other recent quarters, Microsoft’s earnings benefited from a weaker dollar. The company said had it faced the same currency exchange rates as a year ago, its earnings would have been dented by $221 million. The company also had lower payroll costs, primarily due to a $270 million decline in stock-based compensation expenses as it has moved to awarding restricted stock instead of stock options.

Revenue breakdown
The company’s seven business units all posted gains in revenue and either grew their profits or, in the case of Microsoft’s unprofitable units, narrowed losses.

• The client unit, which oversees desktop and notebook versions of Windows, boosted sales to $2.99 billion, up 7 percent from a year earlier, with operating income rising 6 percent to $2.39 billion.

• The server and tools unit grew revenue 19 percent to $2.2 billion, with operating income rising 84 percent to $701 million. The company restated the server unit’s year-ago income to reflect the reclassification of the Windows Security unit, which is now considered to be part of Windows Client.

• Microsoft’s Information Worker unit, which includes the Office productivity suite, saw revenue rise 14 percent to $2.56 billion, and income climb 18 percent to $1.89 billion.

• Fueled by a continued rise in online advertising, the MSN unit posted a 10 percent gain in revenue to $540 million, as income grew 35 percent to $77 million.

• The Microsoft Business Solutions unit, which sells business applications for small and midsize companies, saw its sales increase 9 percent to $160 million, with an operating loss of $41 million–40 percent narrower than the $68 million loss posted a year earlier.

• The mobile and embedded devices unit, which sells software for handhelds and phones, saw its sales climb 30 percent to $69 million and its loss narrow by 41 percent to $20 million.

• Finally, the home and entertainment unit, which includes the Xbox game machine, posted quarterly revenue of $632 million, up 9 percent from the prior year, on higher-than-expected sales of Xbox games. The unit had a loss of $142 million, roughly half of the $273 million loss posted in the same quarter a year earlier.

“Xbox continues to be the only platform to show year-over-year growth and has now outsold Sony PlayStation 2 for two months in a row in the United States,” Microsoft Senior Vice President Robbie Bach said in a statement, adding that the company has had 1.5 million preorders for its “Halo 2” game, which is set to launch Nov. 9.