Microsoft Proves It's a Software Company as Devices Take a Hit

By Scott M. Fulton, III, BetaNews

April 27, 2007, 12:03 PM

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While Microsoft posted a 69% gain in operating income for the quarter, the company was up-front about warning analysts that not all of that income was actually gathered during that quarter alone. Sales of Vista actually began in the prior quarter, with guarantees for upgrades sold to many customers that were met in January. The company chose to realize that revenue when it met its sales commitment.

So while the Client division, which includes Vista, reported revenue gains of 67% annually to $5.3 billion, Liddell stated right away that $1.2 billion of that was deferred revenue. Had there not been a deferral, revenue would have been $4.1 billion, up 37% annually. That's still a nice gain, so is Vista the star of the day?

Believe it or not, no...it's Office 2007, whose sales exceeded expectations in the US by $200 million. It's Office that is helping Microsoft increase its bookings with corporate customers, the number of whose contracts exceeded 10,000 in March.

Devices was not the only division that posted a loss, however; Online Services continues to bleed. There's higher revenue there by nearly 11% annually, to $623 million, but with the cost of acquiring new advertising customers, the division ended up posting a loss of $200 million in operating income.

But as a Sanford Bernstein analyst put it, it appears Microsoft may have stopped the increased deterioration of the division, and perhaps "stabilized the patient." From here, perhaps it no longer needs life support.

"From a quarterly point of view, this was a much better quarter for OSV," Chris Liddell exclaimed. Advertising revenue was up 23%, he said, with at least 20% more growth expected in the fiscal fourth quarter. "That's a reflection of a number of factors: One is the display [ad] growth revenue growing broadly inline with the market; the second is the benefits now of AdCenter coming on-stream." The gap between AdCenter and Yahoo's Overture is wider than had been forecast, he said, and the platform is acquiring greater than the number of new advertisers anticipated."

Last year, we were talking about "Microsoft, the game company," whose rescue of what had been feared to be one of the worst executed consumer launches in American business history was overshadowing the frequent delays to the company's next operating system.

The wheel of fortune keeps turning for Microsoft, and this quarter, the slice of the pie facing us is the client software side, with a peek at an online services division that may finally be on track to stop not growing, and somewhere in the back - kicked into the corner along with the Zune and the other toys - is the game unit they forgot to pick up off the floor before the guests arrived.