Microsoft Q3 2012 by the numbers: $17B revenue, 60 cents EPS

Late this afternoon, after the closing bell, Microsoft revealed results for one of its most uncertain quarters in years. That's because Gartner and IDC report tepid PC shipments and Microsoft prepares to launch a horde of new products later this year, including new versions of Office, Windows and Windows Server, among others. Sometimes sales sag in the quarter or two before new product releases -- and for 2012 there are many core ones coming.

"With the upcoming release of new Windows 8 PCs and tablets, the next version of Office, and a wide array of products and services for the enterprise and consumers, we will be delivering exceptional value to all our customers in the year ahead", Microsoft CEO Steve Ballmer says.

Perhaps businesses share Ballmer's enthusiasm and aren't backing off purchases, particularly those looking to lock in Software Assurance upgrades. For fiscal Q3, ended March 31, Microsoft revenue was $17.41 billion, up 6 percent year over year. Operating income: $6.37 billion, a 12 percent increase. Net income was $5.11 billion, or 60 cents a share -- that's down from $5.23 billion and 61 cents a share a year earlier. However, in the year-ago quarter, Microsoft received a settlement from the IRS that boosted EPS by 5 cents. Removing this one-time event, EPS rose by 7 percent.

Average analyst consensus was $17.18 billion revenue and 58 cents earnings per share, for the quarter. Revenue estimates ranged from $16.61 billion to $17.46 billion, with estimated year-over-year growth of 4.6 percent. By both measures, Microsoft beat the Street.

Q3 2012 Revenue by Division

• Windows & Windows Live: $4.62 billion, up 4 percent from $4.45 billion a year earlier.
• Server & Tools: $4.6 billion, up 14 percent from $4.1 billion a year earlier.
• Business: $5.81 billion, up 9 percent from $5.33 billion a year earlier.
• Online Services Business: $707 million, up 6 percent from $667 million a year earlier.
• Entertainment & Devices: $1.6 billion, down 16 percent from $1.94 billion a year earlier.

Q3 2012 Income by Division

• Windows & Windows Live: $2.95 billion, up 6 percent from $2.8 billion a year earlier.
• Server & Tools: $1.74 billion, up 29 percent from $1.35 billion a year earlier.
• Business: $3.77 billion, up 14 percent from $3.31 billion a year earlier.
• Online Services Business: Loss of $479 million, up 38 percent from $776 million loss a year earlier.
• Entertainment & Devices: $229 million loss compared to 210 million profit a year earlier.

Whither Windows

Laggard PC shipments weighed on Microsoft, which isn't surprising given the continued distraction smartphones and tablets cause consumers -- and that includes those bringing personal devices to work. Still, Windows and Windows Live division revenue grew 4 percent year over year and income by 6 percent (after falling 6 percent and 11 percent, respectively, in fiscal Q2).

IDC puts first calendar quarter year-over-year PC shipment growth at 2.3 percent, but only 1.9 percent by Gartner's estimates.

"The consumer segment continued to be a drag on market growth, as PC demand was low", Mikako Kitagawa, Gartner principal analyst, says. The analyst firm again highlights smartphones and tablets as leaders among those "other devices".

"Slow growth in the US shows that despite interesting and new form factors like all-in-one (AIO) desktop PCs and Ultrabook-class notebook PCs, the market remains conservative and focused on replacements", Loren Loverde, IDC vice president, says. Replacements don't just refer to necessary PC upgrades but tablets being used to supplement existing PCs. The devices replace behavior rather than the older computer.

Still, both analysts expressed optimism for the holidays. "We expect PC shipments to pick up significantly by the fourth quarter and beyond as HDD supply and pricing are normalized, Windows 8 is launched, and replacements pick up", Loverde says. But "the US PC market is likely to remain constrained at least until the launch of Windows 8, which is expected in the fourth quarter of 2012".

The future looks interesting, as Microsoft prepares its increasingly aggressive response to iPad. Yesterday, the company disclosed Windows 8 Enterprise feature and licensing benefits -- and nearly all relate to mobility or mobile devices. They also tip how much emphasis Microsoft will place on Windows RT, which runs on ARM processors and is queued for tablets.

Two Software Assurance benefits stand out: Extended Virtual Desktop rights for Windows RT devices and extended rights for companion devices.

"So that means that WinRT devices, when used by someone with a PC covered by SA, are automatically given the same virtualization rights as the PC itself, notably the right to access a remote instance of Windows running in a VM (a VDI scenario)", Paul DeGroot, president of Pica Communications, tells me today.

"If you have something other than a WinRT device you have to pay more", he continues. "As with the WinRT device, you need SA on the PC; but after that you still need to purchase a Companion Device License for Windows SA. However, this license will cover up to four devices, like your iPhone, iPad, and home PC or Mac.

DeGroot emphasizes: "Overall, I'd rate this as an improvement over the old SA Roaming Rights, which were useless to most people, but this is a case where MS is clearly giving WinRT an advantage over the competition".

Division Highlights

Microsoft reports revenue and earnings results for five divisons: Windows & Windows Live, Server & Tools, Business, Online Services and Entertainment & Devices.

Windows & Windows Live. Strong demand among businesses helped the division to overcome the effects of weaker than-expected PC demand. Revenue rose by 4 percent year over year, and operating income by 6 percent.

Microsoft estimates that global PC sales to businesses grew 8 percent, but were flat among consumers. However, when removing continued, steep netbook sales declines, consumer PCs actually rose 6 percent. Together, Microsoft estimates that PC sales grew by 2 percent and 4 percent, which is stronger than either Gartner or IDC estimates.

More granularly, like other recent quarters, OEMs accounted for 75 percent of Windows sales. Despite the increase in sales to businesses, the mix was only 33 percent to them but 41 percent to consumers. OEM revenue grew by 4 percent.

Looking ahead to fiscal fourth quarter, Microsoft is cautious about negative market dynamics, but expects business PC sales to continue growing.

The company estimates that Windows 7 is deployed on 40 percent of enterprise desktops.

Server & Tools. Revenue rose 14 percent year over year and operating income by 29 percent, delivering a simply stunning quarter. The division is insulated against economic maladies, because about 50 percent of revenues come from contractual volume-licensing agreements.

"Product revenue increased $396 million or 12%, driven primarily by growth in SQL Server, Windows Server, and System Center, reflecting continued adoption of Windows platform applications.", according to the company's 10-Q filing.

Looking ahead to fiscal Q4, Microsoft expects volume-license sales to grow in the high teens.

Business. The division was the quarter's big overall performer (again); revenue rose 9 percent and income by 14 percent year over year.

Annuity licensing continued to lift sales, an ongoing trend. "MBD revenue increased primarily reflecting sales of the 2010 Microsoft Office system. Business revenue increased $469 million or 11 percent, primarily reflecting growth in multi-year volume licensing revenue, licensing of the 2010 Microsoft Office system to transactional business customers, and an 11 percent increase in Microsoft Dynamics revenue. Consumer revenue increased $16 million or 2 percent due mainly to increased sales of the 2010 Microsoft Office system", according to the company.

More numbers: Multi-year license revenue grew by 13 percent, Dynamics CRM by 30 percent and Lync by 35 percent.

Like Server & Tools, Business division is largely insulated against sluggish PC sales. Sixty percent of revenue comes from annuity licensing to businesses.

Looking ahead to fiscal fourth quarter, Microsoft expects double-digit volume-license growth.

Online Services Business. Online services revenue rose by 6 percent, while the operating loss decreased by 38 percent. Search and display ads drove up online advertising revenue by 9 percent -- $51 million to $639 million. "OSD operating loss decreased due to higher revenue and lower cost of revenue and sales and marketing expenses.", according to the 10-Q.

Looking ahead to fiscal Q4, Microsoft expects continued improvements.

Entertainment & Devices.  Revenue fell by 16 percent. Microsoft shipped 1.4 million Xboxes during the quarter -- a 1.3 million-unit decline from a year earlier. Xbox revenue fell 33 percent, or $584 million.

There were -- get this -- 100 billion minutes of Skype calls -- up 40 percent year over year.

Looking ahead to fiscal Q4, Microsoft expects double-digit revenue growth.

Photo Credit: Microsoft