Despite softness in the PC market, Microsoft Thursday defied expectations to post record earnings of 78 cents per share for its second quarter, ending Dec. 31, 2011. It announced quarterly revenue of $20.89 billion, up 5 percent year-over-year, operating income of $7.99 billion and net income of $6.62 billion.
Wall Street analysts had been looking for 76 cents per share, on average, according to data compiled by Bloomberg.
"We delivered solid financial results, even as we prepare for a launch year that will accelerate many of our key products and services," said Steve Ballmer, chief executive officer at Microsoft (NASDAQ:MSFT). "Coming out of the Consumer Electronics Show, we're seeing very positive reviews for our new phones and PCs, and a strong response to our new Metro style design that will unify consumer experiences across our phones, PCs, tablets and television in 2012.
Analysts had been expecting the Redmond, Wash.-based software behemoth to struggle a bit in the wake of last year's severe flooding in Thailand. The flooding destroyed about a quarter of the world's hard disk drive manufacturing capacity and led computer manufacturers to lower their inventory levels to fall in line with the availability of hard drives.
But while Microsoft Chief Financial Officer Peter Klein conceded that Windows 7 sales took a hit as a result—particularly in the consumer segment—the firm was buoyed by its Server & Tools business, Online Services Division and Entertainment & Devices Division, all of which posted double-digit growth year-over-year.
"The PC market was challenged this quarter, with particular softness in the consumer segment," Klein said. "However, Windows 7 momentum in the enterprise continued and today, over one-third of enterprise desktops worldwide are on Windows 7. And with the future release of Windows 8, we believe the ecosystem will benefit from the new range of capabilities and scenarios that it enables."
The Windows and Windows Live Division posted revenue of $4.74 billion, down 6 percent from the year ago quarter. Klein said Microsoft believes the PC sector will continue to be affected by the hard drive shortage at least through the next quarter.
The Server & Tools business posted $4.77 billion in second quarter revenue, an 11% increase year-over-year, reflecting double-digit revenue growth in Windows Server and SQL Server premium editions and more than 20 percent growth in System Center revenue.
"CIOs are increasingly turning to our business infrastructure offerings, including Windows Server, Hyper-V, and System Center, as they look to Microsoft for the security, flexibility and manageability they need to build world-class private clouds," Klein said. "This quarter marked the ninth consecutive quarter of double-digit growth for Windows Server Premium revenue and the eleventh quarter of double-digit revenue growth for System Center. "
The Online Services Division reported revenue of $784 million, a 10 percent increase from the year ago quarter. Klein noted that Bing's organic US market share grew to 15.1 percent, while its Bing-powered US market share, including Yahoo! Properties, was about 27 percent.
"In search, we saw improvements in RPS this quarter as we partnered closely with Yahoo! to address the monetization challenges of the combined ad platform," Klein said. "We are pleased with the progress and are working hard to continue that trajectory."
The Entertainment & Devices Division posted revenue of 4.24 billion, an increase of 15 percent year-over-year, driven by strong holiday sales of the Xbox 360 and Kinect. Klein said the Xbox 360 installed base now totals about 66 million consoles and 18 million Kinect sensors, while Xbox Live now has 40 million members worldwide, up 33 percent from a year ago.
"In addition to the continued strength of our commercial business, this holiday season was the strongest in Microsoft history, thanks to good sales and execution and compelling products like Xbox 360 and Kinect," said Kevin Turner, chief operating officer at Microsoft.
Klein noted that Microsoft intends to take the Kinect gesture-recognition technology further with Kinect for Windows, which it will launch on Feb. 1.
The Microsoft Business Division reported second quarter revenue of $6.28 billion, up 3 percent from the year ago quarter. Klein said nearly 200 million licenses of Office 2010 have been sold in the 18 months since its launch, and revenue from Exchange and SharePoint grew by 10 percent or more year-over-year, while revenue from Lync and Dynamics CRM grew by more than 30 percent.
Klein also noted that its Office 365 cloud play now has 100,000 customers.
"As businesses large and small look to the cloud to lower costs and enable new ways of supporting a distributed workforce, they are turning to Microsoft," he said. "With Office 365, we give customers powerful productivity and collaboration tools at great value. Today, more than 100,000 businesses have made the commitment to our online services. Whether on premise or in the cloud, Microsoft remains the top choice for productivity."