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Microsoft Revenues Hold With Kinect And Windows 7

Microsoft posted stronger quarterly revenues than expected but still faces challenges with its online services

Numbers-wise, Microsoft’s latest quarterly earnings suggest a lot of upside for the company, with a stronger-than-expected $19.95 billion (£12.57 billion) in revenue and $6.63 billion (£4.18 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.

Kinect Connects And Business Unit Booms

Microsoft reported positive news in a number of diverse segments. For the three months ended December 31, its Business Division revenue grew 24 percent year-over-year. In addition, some eight 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 in a January 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 licences sold since the operating system’s October 2009 release. Office 2010 licences 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 (£342 million) for the quarter, a significant downtick from the $463 million (£292 million) burnt during the same quarter in 2009. With total losses of $1.1 billion (£693 million) for the six months ended December 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.

Azure Obscured By Cloud

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 Salesforce.com, 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 epicentre of its cloud strategy – is primed to undergo a shakeup this year with the departure of long-time 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 January 10 email 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 realise we have a lot of work ahead of us.”

Microsoft re-confirmed that some two 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.

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