Strong Microsoft Revenues, Despite Cloud

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Microsoft posted strong quarterly results but cloud and online services are not yet major revenue drivers

For its first fiscal quarter of 2012, Microsoft reported strong sales of traditional software such as Windows and Office but its online services remain a relatively small part of the overall revenue scheme. The company is betting that cloud services will eventually help supplant traditional software as a major revenue driver.

Overall, Microsoft reported revenue of $17.37 billion (£11bn) for the quarter ended 30 September, a year-over-year increase of seven percent. Operating income, net income, and diluted earnings per share all rose.

Cloud ‘monetisation challenges’

During an earnings call, Bill Koefoed, Microsoft’s general manager of investor relations, categorised the company as “thrilled” with the progress of Office 365, Microsoft’s cloud-productivity platform, but declined to break out specific subscriber numbers.

He alluded to “monetisation challenges” for aspects of Microsoft’s Online Services division. Although overall revenue grew 19 percent, quarterly losses for the division totalled $494 million (£313m). Microsoft is depending on the data from its Bing search engine to help inform and refine the rest of its cloud services.

Growing market share and managing expenses are the keys to eventually turning online services toward profitability, Microsoft executives said during the earnings call. Microsoft is working closely with Yahoo, with which it has a deep search-and-advertising partnership, to make that happen.

Although Microsoft was built on sales of traditional software such as Windows, its executives have lately embraced an “all-in” cloud strategy, centered largely on subscription-based services to businesses large and small. Microsoft is also pushing the cloud in the consumer realm, notably in products such as Windows Phone, which is receiving a broad-based Mango update with some 500 new tweaks and features.

Strength in overall results

Several Microsoft divisions reported strong revenue, including its Business Division, which experienced an eight percent increase from the year-ago quarter, to $5.62 billion (£3.56bn). Server & Tools segment revenue increased 10 percent year-over-year, to $4.25 billion (£2.69bn).

Microsoft also reported Windows and Windows Live revenue of $4.87 billion (£3.08bn), a two percent increase from the prior-year period. Last quarter, softening PC sales had forced the division into a one percent decline. More than 450 million Windows 7 licences have sold to date. Over the past few months, Microsoft has offered several glimpses of the next version of Windows, codenamed Windows 8, which will feature radical changes to its user interface.

Koefoed estimated that the overall PC market grew between one percent and three percent during the quarter, overcoming a weakness in netbook sales. “We have seen the cannibalisation of netbooks,” he said, adding that Windows sales on traditional notebooks had risen 14 percent.

Microsoft recently completed its acquisition of Skype, incorporating the communications company as a new division headed by former Skype CEO Tony Bates. The communications software will eventually find its way into a host of Microsoft products.

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