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Microsoft Beats Estimates, But Net Income Keeps Falling; Online Revenue Down 5.7 Percent

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A second big day in a row for Microsoft (NSDQ: MSFT). Following on its Thursday release of Windows 7, the company surprised analysts with better than expected first quarter results — and its stock jumped nearly 10 percent in pre-market trading. It was a sharp contrast to last quarter, when the company’s results fell far short of expectations.

Overall, revenue was down 14 percent, while net income dropped 18 percent. Sales at all five of the company’s business groups also fell. However, in its release, Microsoft pointed to strong demand for Windows and Xbox as driving a better than expected quarter. And the company benefited from cost-cutting; research and development, sales and marketing, and general administrative expenses were all down substantially.

Notably, for a company that has been grim on the state of the economy for most of the last year, Microsoft also said in its quarterly filing with the SEC that it saw the “potential for (economic) improvement in calendar year 2010” although it cautioned the timing was uncertain.

1Q 2009 1Q 2010 Estimate
EPS $0.48 $0.40 $0.33
Net Income $4.37B $3.57B
Revenue $15.06B $12.92B $12.58B

Online Services: Sales at Microsoft’s online division dropped 5.7 percent to $490 million, while operating losses jumped from $332 million to $490 million. The drop in sales was much more muted than last quarter, when the division posted a 14 percent fall in revenue. Online ad sales fell three percent to $421 million.

Entertainment and devices: At the entertainment and devices group, which encompasses Xbox and Windows Phones, sales edged down slightly to $1.891 billion. Profits, however, jumped to $294 million, from $134 million during the same quarter a year ago. Xbox 360 platform and PC game revenue was up nearly 8 percent, despite a price cut during the quarter.

Other businesses: Microsoft’s flagship Windows division posted a 39 percent drop in sales to $2.62 billion; operating income was down 52 percent. Sales at the business unit — which encompasses Office — fell nearly 12 percent. And revenue at the server and tools group was basically flat.

Outlook: For the fourth straight quarter, Microsoft did not provide any specific guidance for the coming quarter, although it did say that it expected operating expenses of between $26.2 billion and $26.5 billion for the year. That was down from the guidance it provided last quarter.

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