Microsoft: Windows 7 A Winner, All Other Results Weak

Microsoft (NASDAQ: MSFT) traded within pennies of its 52-week high today, a sign of the optimism that the market has about the technology sector in general and especially the  strength of the adoption of Window 7. The failure of Vista is now only an unpleasant memory

Analysts expected the software giant to report earnings of $.42  for the period ended in March, and $14.4 billion in revenue, according to  forecasts from Thomson Reuters. Microsoft announced record third-quarter revenue of $14.5 billion for the quarter ended Mar. 31, 2010, a 6% increase from the same period of the prior year. EPS rose to $0.45 per share, which represented increases of 17%, The company had revenue of $13.6 million in the same quarter a year ago and $.33 EPS.

Windows revenue was up 28%, compared with the same quarter a year earlier, driven by strong demand for Windows 7. More than 10% of all PCs worldwide are running Windows 7 today, making Windows 7 by far the fastest-selling operating system in history. IDC recently reported that global PC sales were up 20% in Q1

But, a look at the company by division shows that the Windows success masked other weaknesses.

Revenue in the Servers and Tools division was up only 2% to $3.57 bilion. Operating income in the division was flat at $1.25 billion. The products that Microsoft relies on in this segment of the company are facing increased pressure from cloud computing and virutalization software driven by software products from companies which include Google (NASDAQ: GOOG) and VMWare (NYSE: VMW) Microsoft has begun to enter these sectors, but that effort is still in early stages.

The revenue in the firms’ Business division was down 3% to $4.24 billion Operating income was down 1% to $2.62 billion. The poor results are probably a result of slow IP spending at large companies, but that is only a part of the story. Oracle (NASDAQ: ORCL), the largest enterprise software firm in the world and SAP (NYSE: SAP) have new products which rival many of Microsoft’s Business products.

Devices and Entertainment revenue, almost completely sales of the Xbox, were up 1% to $1.66 billion. The division swung from a loss of $41 million to a profit of $165 million. Microsoft obviously held its own against competitors the Sony (NYSE: SNE) PS3 and Nintendo Wii. Sales of game consoles dropped sharply in 2009. Those sales have stabilized in the last two months, but in large part due to price cuts.

The carefully watched online operations at Microsoft posted an increase in revenue to $566 million from $507 million last year. This was almost certainly due to a modest recovery in the online ad market and a slight improvement in the market share of Bing which competes with Yahoo! and Google (NASDAQ: GOOG). The top line growth came at a significant cost. The loss in the division moved from $411 million last year to loss of $713 million in the most recent quarter. Most of the higher expenses were due to early payments to Yahoo! which were made a part of a joint venture in the search market. Other costs associated with the launch of Bing almost certainly hurt results as well.

Microsoft beat estimates. but the stock fell 5% after hours to $30.20. The success of Windows was only made more prominent because of failures in progress at the other four operating units of the company.