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Microsoft Credits Windows 7 for Record Earnings

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Exceptionally strong sales of Windows 7 helped drive Microsoft (NASDAQ: MSFT) to another record quarterly performance, company executives said today.

For the third quarter of Microsoft’s fiscal 2010, ending March 31, the company turned in revenues of $14.50 billion, up 6 percent from the same period a year ago, while earnings per share (EPS) for the quarter came in at $0.45, a gain of 36 percent.

Analysts polled by Thomson Financial in advance of the announcement had expected Microsoft to turn in revenues of $14.38 billion and EPS of $0.42 for the quarter.

Microsoft cited operating income for the quarter of $5.17 billion, and net income of $4.01 billion — increases of 17 percent and 35 percent, respectively, over the third fiscal quarter of 2009.

Adjusting for $300 million in deferred revenues due to the company’s “tech guarantee” program reserves for pre-sales of Office 2010, Microsoft’s revenue for the quarter came in at $14.81 billion, an increase of 8 percent overall.

In advance of Microsoft’s announcement, analysts expected to see the company’s earnings again buoyed by strong sales of Windows 7 to consumers — and possibly the early signs of adoption of the new system by enterprise customers.

That proved to be the case with consumer sales of Windows 7 — both on new PCs and as packages of the new system.

“More than 10 percent of all PCs worldwide are running Windows 7 today, making Windows 7 by far the fastest-selling operating system in history,” the company said in a statement.

A similar story may be in the works for enterprise customers, with Microsoft suggesting that traction in that market — which typically takes far longer than in the consumer space — is ratcheting up.

“Business customers are beginning to refresh their desktops and the momentum of Windows 7 continues to be strong,” Kevin Turner, Microsoft’s chief operating officer, said in a statement.

Besides strong Windows sales, Microsoft CFO Peter Klein credited cost controls with helping maintain and grow the bottom line.

“Our record third-quarter revenue along with continued rigor on cost management resulted in exceptional EPS growth,” Klein said in a statement.

For the same quarter a year ago, Microsoft had brought in $13.65 billionin revenues, though the company’s bottom line proved something of a letdown, with net income of $2.98 billion and EPS of $0.33 — declines of 32 percent and 30 percent from the previous year.

In contrast, in its second fiscal quarter of 2010, Microsoft broke previous records largely on strong sales of Windows 7to consumers during the holiday shopping season.

Continued signs of a tech sector turnaround

Microsoft’s earnings came on the heels of strong numbers from tech industry stalwarts such as Google (NASDAQ: GOOG), IBM (NYSE: IBM) and Apple (NASDAQ: AAPL).

Another bellwether for the IT industry in general, Intel (NASDAQ: INTC), also released better-than-expected numbers.

In fact, industry researchers Gartner and IDC both recently announced that PC sales during most recent quarter had reboundedfrom their precipitous collapse a year ago, showing worldwide growth of 27.4 percent and 24.2 percent respectively.

Microsoft business initiatives gearing up

Meanwhile, Microsoft is preparing to launch the cornerstone of its business productivity push, starting with the May 12 rollout to enterprise customers of Office 2010, the next release of its desktop productivity applications and one of the company’s top income producers. That is likely to arrive too late to contribute much, if anything, to the bottom line during the current fiscal year, however, since it ends June 30.

Other products queued up for the spotlight include the latest version of its popular database engine, SQL Server 2008 Release 2 (R2), which was released to manufacturing (RTM) earlier this week.

Microsoft’s cloud, Windows Phone 7, Yahoo deal not cash cows just yet

While company executives also credited Bing, Xbox Live, and Microsoft’s cloud services as contributing to the overall revenue picture during third quarter, several of those products and initiatives are not poised to produce profits during the current fiscal year — or, in fact, any time soon.

On the gaming side of the house, for instance, Microsoft will also have to wait until next fall before delivering its “Project Natal” body-motion game controller, which it has said could revolutionize the electronic games market.

Additionally, in the early years of its ten-year search deal with Yahoo, Microsoft does not expect to see any income from the cut of Yahoo’s search-based ads that it receives in return for providing its search technology to the Web portal. Partly because of that, and partly due to startup costs for its new search engine, which launched in early June last year, Microsoft’s Bing is likely to remain a net loser for some time.

Neither are Microsoft’s long-term investments in cloud computing services and a global network of datacenters to support them expected to produce profits any time soon, the company has said.

Additionally, the latest pieces to Microsoft’s mobile phone strategy are not due until fall, including the company’s Windows Phone 7 operating system, which takes aim at Apple’s iPhone and Google’s Nexus One.

Microsoft’s stock was down $1.39 at $30.02 in early after hours trading.

Stuart J. Johnston is a contributing writer at, the news service of, the network for technology professionals.

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