Microsoft Tops Forecasts; Entertainment And Devices Sales Up 60 Percent

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Despite a weak market for PC sales, Microsoft (NSDQ: MSFT) once again topped analyst expectations during its most recent quarter, reporting a 13 percent increase in sales to $16.43 billion. Earnings per share came in at 61 cents. On average, analysts had expected the software giant to post sales of $16.19 billion and earnings per share of 56 cents. The company said that the results demonstrated the “breadth of our businesses” despite the “mixed PC environment,” and indeed it was the company’s non Windows units that reported the best results.

The company’s entertainment and devices division posted a 60 percent increase in revenue, which the company attributed to sales of its hit Kinect control system for the Xbox. The business division, which includes Office, reported a 21 percent increase in year-over-year sales. Server and tools was up 11 percent. And the online services division, which includes Bing and MSN, reported a 14 percent increase, which the company said was primarily attributed to rising search revenue. By contrast, Microsoft’s Windows and Windows Live unit reported a 4 percent decrease in sales. That division — along with the money-losing online services division — were the company’s only units to report decreases in operating income.

The unit-by-unit numbers:

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In its quarterly filing, Microsoft said that the higher losses at the online services division were due to increased operating costs in part because of the costs associated with its search alliance with Yahoo (NSDQ: YHOO). In its own earnings report last week, Yahoo said that the search alliance was not delivering the revenue per search it had hoped for and Microsoft also referred to those issues, saying that while search revenue grew overall because of its rising market share, the growth was offset by “decreased revenue per search primarily related to challenges associated with optimizing the adCenter platform for the new mix and volume of traffic from the combined Yahoo! and Bing properties.”

As for Microsoft’s fast-growing entertainment and devices unit, Microsoft said the sales increase there was driven by “sales of Kinect sensors, increased volumes of Xbox 360 consoles, and higher Xbox LIVE revenues.” Notably, there was no mention of higher revenue associated with the Windows Phone business. Executives were also vague about that business’ prospects during the earnings call, only saying that “product reviews are good,” “customer satisfaction is high,” and that the company’s alliance with Nokia (NYSE: NOK) had generated new interest among developers in building apps for the platform.

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