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January 29, 2010

Windows 7 jump starts Microsoft earnings

Posted by David Hunter at 9:04 AM ET.

Microsoft yesterday reported 2nd quarter financial results for FY 2010 (ending Dec. 31, 2009) and sales of Windows 7 have jump started the old Microsoft money machine that had been stalled last quarter.

Microsoft Corp. today announced record revenue of $19.02 billion for the second quarter ended Dec. 31, 2009, a 14% increase from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $8.51 billion, $6.66 billion and $0.74 per share, which represented increases of 43%, 60% and 57%, respectively, when compared with the prior year period.

These financial results include the recognition of $1.71 billion of deferred revenue, an impact of $0.14 of diluted earnings per share, relating to the Windows 7 Upgrade Option Program and pre-sales of Windows 7 to OEMs and retailers before general availability. Adjusting for the deferred revenue recognition, second-quarter revenue totaled $17.31 billion, and diluted earnings per share totaled $0.60 per share.

“Exceptional demand for Windows 7 led to the positive top-line growth for the company,” said Peter Klein, chief financial officer at Microsoft. “Our continuing commitment to managing costs allowed us to drive earnings performance ahead of the revenue growth.”

Windows 7 and Windows Server 2008 R2 launched globally on October 22 as anticipated. Through the second quarter, Microsoft has sold over 60 million Windows 7 licenses making it the fastest selling operating system in history.

“This is a record quarter for Windows units,” said Kevin Turner, chief operating officer at Microsoft. “We are thrilled by the consumer reception to Windows 7 and by business enthusiasm to adopt Windows 7.”

Taking a look at the quarterly results of each of the business units from the 10-Q filing:

Windows & Windows Live

Windows Division revenue increased due to strong sales of Windows 7 and PC market improvement. We estimate total worldwide PC shipments from all sources grew approximately 15% to 17%. OEM revenue increased $2.3 billion or 72%. Excluding $1.7 billion of revenue recognized related to the Windows 7 Deferral, OEM revenue increased $664 million or 21%, while OEM license units increased 22%. The OEM revenue increase was primarily driven by PC market growth, higher Windows attach rates across all regions, channels, and types of PCs and the restoration of normal OEM inventory levels, offset in part by PC market changes, including stronger growth of consumer PCs versus business PCs and of emerging markets versus developed markets. Other revenue increased $511 million or 60% driven primarily by strong Windows 7 retail sales.

Costs were up for Windows 7 marketing and yes, business is lagging consumers in both PC purchases and Windows 7 adoption rates, but it is a solid story albeit one that Microsoft wished they could have told when Vista shipped. Windows Live is apparently a fly speck.

Server & Tools

Server and Tools revenue increased reflecting growth in product revenue, offset in part by a decline in services revenue. Product revenue increased $103 million or 3%, primarily driven by growth in Windows Server, Enterprise CAL Suites and System Center revenue. The growth in product revenue reflects continued adoption of Windows platform applications. Services revenue declined $14 million or 2%, primarily due to decreased revenue from consulting services.

Server and Tools operating income increased primarily due to product revenue growth and a decrease in research and development expenses. Research and development expenses decreased $41 million or 7%, primarily driven by decreased headcount-related expenses and third-party development and programming costs.

Server and Tools is still in the doldrums and likely will remain there until there is a turnaround in the general economy. Meanwhile they are cutting costs.

Microsoft Business Division (mostly Office)

MBD revenue decreased reflecting decreased business revenue partially offset by increased consumer revenue. Business revenue decreased $231 million or 6%, primarily reflecting a decline in licensing the 2007 Microsoft Office system to transactional business customers, offset in part by a 1% increase in Microsoft Dynamics revenue. Consumer revenue increased $95 million or 12%, primarily as a result of growth in the PC market.

MBD operating income was flat reflecting decreased revenue, offset by decreased sales and marketing and research and development expenses. Sales and marketing expenses decreased $81 million or 7%, primarily driven by a decrease in corporate marketing activities and headcount-related costs associated with our corporate sales force. Research and development expenses decreased $64 million or 15%, primarily as a result of capitalization of certain Microsoft Office system software development costs.

Another division awaiting a general economic rebound. I don’t think Office 2010′s expected arrival in June will change the story in the same way that Windows 7 did.

Online Services Division

OSD revenue decreased as a result of lower Access and online advertising revenue. Access revenue decreased $14 million or 29%, reflecting continued migration of subscribers to broadband or other competitively-priced service providers. Online advertising revenue decreased $11 million or 2%, to $516 million, reflecting a decrease in display advertising and advertiser and publisher tools revenue, offset in part by an increase in search revenue. Foreign currency exchange rates accounted for a $13 million or two percentage point increase in revenue.

OSD operating loss increased mainly due to increased cost of revenue and decreased revenue, offset in part by decreased research and development expenses. Cost of revenue increased $171 million or 50%, primarily driven by higher online traffic acquisition costs. Research and development expenses decreased $49 million or 17%, primarily due to decreased third-party development and programming costs and headcount-related expenses.

OSD is in the red yet again and the fact that the decline in Microsoft’s old dial-up ISP business (Access) is material to the bottom line shows that it is still struggling. The only good news was that search revenue was up, but not enough to counteract the slump in display ads on Microsoft Web properties.

Entertainment & Devices Division

EDD revenue decreased reflecting a $295 million or 12% decline in Xbox 360 platform and PC game revenue. This decrease was due mainly to decreased revenue from Xbox 360 video games, decreased Xbox 360 consoles sold, and decreased revenue per console, offset in part by increased Xbox LIVE revenue. The decreased revenue from Xbox 360 video games was due primarily to the release of two significant games in the second quarter of the prior year. We shipped 5.2 million Xbox 360 consoles during the second quarter of fiscal year 2010, compared with 6.0 million Xbox 360 consoles during the second quarter of fiscal year 2009. The decreased revenue per console resulted from price reductions during the past 12 months. Non-gaming revenue decreased $59 million or 8%, primarily reflecting decreased sales of Zune digital music and entertainment devices and Windows Mobile device platforms. Foreign currency exchange rates accounted for a $49 million or two percentage point increase in revenue.

EDD operating income increased due to reduced operating expenses. Cost of revenue decreased $478 million or 23%, primarily due to lower Xbox 360 console costs, offset in part by increased royalties to partners related to increased Xbox LIVE transactions. Sales and marketing expenses decreased $75 million or 15%, primarily due to decreased marketing for the Xbox 360 platform. Research and development expenses decreased $50 million or 10%, primarily reflecting decreased headcount-related expenses and third-party development and programming costs.

EDD nearly tripled their profit compared to the year ago quarter despite reduced revenue. This was due to Xbox 360 cost reductions which is perhaps all that can be expected until the economic outlook improves. Sales of the Zune and more shockingly, Windows Mobile, didn’t help any.

Bottom line:

All in all, it was a solid performance by Microsoft given the economic conditions and the overall result beat Wall Street estimates with a mild boost to the stock price in after hours trading. Windows 7 could not have come along at a better time for Microsoft.

Filed under Financial, General Business, Microsoft

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January 7, 2010

Microsoft does CES 2010

Posted by David Hunter at 8:25 AM ET.

Microsoft’s Steve Ballmer and Robbie Bach delivered the keynote last night at the 2010 Consumer Electronic Show in Las Vegas and it was the usual mixture of self-congratulatory boosterism and product and technology demos. Here is my list of highlights:

Windows 7

After a report on how well Windows 7 is selling, there were the PC demos including a prototype Hewlett-Packard slate PC that the technical press was pining for.

It looks like a touch enabled netbook to me and while it may have a niche, I suspect I would be screaming for a keyboard (or at least a stylus) in under a minute of usage. Perhaps more interesting were the ultrathin Lenovo A300 laptop with a 21.5" screen and the Sony VAIO home entertainment notebook with a 24" screen. How big does a laptop have to get before it becomes a single element desktop?


HP is making Bing the default Web search engine and MSN the default home page on all their PCs in 42 countries.


Ballmer put the usual lipstick on this pig and Robbie Bach appeared later to flog upcoming games (including another lucrative Halo version) and tout Project Natal, the motion sensing technology that will appear later this year to replace the standard controllers for some games.

Windows Mobile


Mediaroom 2.0

Bach also announced Mediaroom 2.0, the latest version of Microsoft’s IPTV offering for service providers which now supports PCs and smartphoes as well as set top boxes and Xbox consoles for TV viewing.


Microsoft really did not have much of its own to show again this year. I am almost beginning to miss the goofy Bill Gates future technology skits.

Filed under Bing, CES 2010, Conferences, Coopetition, Executives, HP, IPTV, Microsoft, Microsoft TV, OS - Client, Robbie Bach, Service Providers, Steve Ballmer, Technologies, Windows 7, Windows Live, Windows Mobile, Windows Mobile 6.5, Xbox

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January 6, 2010 buys URL

Posted by David Hunter at 10:05 AM ET.

It was revealed yesterday that (or as they like to call it these days – the msnbc Digital Network) purchased the URL in December for an undisclosed price:

The msnbc Digital Network today announced its acquisition of the URL aims to be the fastest, most accurate site for live breaking news from around the globe. The site currently features up-to-the-second headlines from multiple news sources and will continually advance to meet hard news consumers’ expectations.

Actually, it currently seems to merely reproduce the @breakingnews Twitter feed, but that is apparently the point since took over management of @breakingnews in November. So what’s the rationale for all this?

The latest addition to the msnbc Digital Network will focus on up-to-the-second news coverage from multiple sources, executives of the company said. ( is a Microsoft – NBC Universal joint venture.)

"It’s a different experience for news users, rather than any kind of diminishment for," Charles Tillinghast, president of the msnbc Digital Network, said in an interview. The move is "consistent with our strategy of creating different news experiences for different user interests," he said.

"Not everyone wants news surrounded by commentary or features," he explained in a statement. "Our goal as a news organization is to provide the most relevant experiences to satisfy distinct needs. Hard and fast breaking news is currently an underserved market. With we can now provide the optimal solution."

Well, presuming someone looks at it instead of the Twitter feed, you can put ads on a Web page

Filed under, Microsoft

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Microsoft reveals US Office 2010 versions and pricing

Posted by David Hunter at 9:20 AM ET.

Microsoft yesterday revealed the versions and estimated US retail pricing for Office 2010 which is coming in June. Here’s a summary table:

Version Retail Boxed Product Product Key Card
Office Home and Student $149 $119
Office Home and Business $279 $199
Office Professional $499 $349
Office Professional Academic $99 N/A

The exact contents of each version are shown in this Microsoft document but basically Home and Student has Word, Excel, PowerPoint, and OneNote; Home and Business adds Outlook; and Professional adds Publisher and Access. As always, the academic version is available through academic resellers for use by academic faculty and students.

The Product Key Card is a new retail delivery mechanism where the consumer effectively purchases a license number that will unlock a copy of Office that has been preloaded on their new PC by the manufacturer along with the free Office Starter 2010 Edition which includes advertising supported editions of of Word and Excel. Note also that:

Ed Bott has a useful discussion of the changes compared to Office 2007 which include price decreases at the low end where Microsoft has the most competition from free Office alternatives (Starter Edition will help too) and the complete elimination of upgrade pricing. Microsoft may have been forced into the latter by the complexity of dealing with new electronic delivery mechanisms like the Product Key Card and Click-To-Run, but I am sure that the idea that a new PC simply deserves a new version of Office without fooling with an upgrade is something that their marketers would love to foster.

Filed under General Business, Marketing, Microsoft, Office, Office 2010

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