Microsoft 'Kinects' with a 30% profit jump

@CNNMoneyTech July 21, 2011: 6:16 PM ET
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NEW YORK (CNNMoney) -- Even when Windows is sputtering, Microsoft still has plenty of gas left in the tank.

Microsoft on Thursday reported that sales of Xbox 360 and Kinect soared 30% in the past quarter, as the video game system maintained its position as the top console for the twelfth month in a row.

The software giant's business products, leveraged by strong demand for Office 2010 and a piqued interest in the cloud-based Office 365, rose 7%. And sales in its server and tools unit jumped 12%.

All that helped Microsoft grow its overall sales by 8% over the past three months to $17.4 billion -- despite a sales slump in its Windows division.

Windows revenue fell 1%, marking the second straight quarter of declines. Consumer personal computer sales continue to weigh on sales of the operating system, even as businesses continue to buy up PCs in quantities that far exceeded the company's forecast. Overall, Microsoft said PC sales fell 2% in the quarter.

The company continued to say that tablets like the iPad are eating into consumers PC purchases. That was evident when tech bellwether Intel (INTC, Fortune 500) reported revenue on Wednesday that rose to a record high, even as its Atom netbook processor sales slipped 15%.

But Microsoft is hardly giving up on its Windows division. Just 25% of businesses are running Windows 7, signaling that businesses have "quite a ways to go in their refresh cycle," said Todd Setcavage, Microsoft's director of investor relations.

Consumer PC sales also continue to grow strong in the emerging markets like East Asia, the Middle East and Latin America, even as they slump in the United States and Europe.

Bing continues to be a weak spot for the company. Microsoft's online services division, which includes Bing, lost $728 million in the quarter and $2.6 billion in the past twelve months. Microsoft still hasn't turned a profit in that unit.

Still, Microsoft had plenty to smile about over the past three months. The company continued to sign on long-term contracts with business customers in its Office and server units, building up $17.1 billion in promised, but yet-to-be-earned revenue.

The company also in May put in a bid to buy Skype, the Internet phone and video chatting service, which the company hopes to leverage to compete with Cisco's (CSCO, Fortune 500) WebEx online meeting client. And last month, it launched its Office 365 service in an attempt to build up its Office base and to stop Google Apps in its tracks.

By the numbers

The Redmond, Wash.-based software giant said net income in its fiscal fourth-quarter, which ended June 30, rose 30% to $5.9 billion, or 69 cents per share. Analysts polled by Thomson Reuters forecast earnings of 58 cents per share.

But much of the reason Microsoft beat on profit was due to a huge change in the company's tax rate. Microsoft's effective tax rate was just 7% in the quarter, compared to 25% a year ago, which the company said was "due to a higher mix of earnings taxed at lower rates in foreign jurisdictions."

The company said it produced and distributed a greater number of products and services in regional operations centers in Ireland, Singapore and Puerto Rico, which are all subject to lower tax rates.

Sales rose 8% to $17.4 billion, topping analysts' forecasts of $17.2 billion.

After initially rising, shares of Microsoft (MSFT, Fortune 500) fell very slightly after hours.

Microsoft's chief rivals Apple (AAPL, Fortune 500) and Google (GOOG, Fortune 500) also impressed with earnings during the past three months. Apple said Tuesday that it sold a record 9.25 million iPads, and Google said it is activating 550,000 Android phones each day -- both threats to Microsoft's Windows and Windows Phone 7 businesses..

The company's search partner Yahoo (YHOO, Fortune 500), however, didn't fare quite so well. Yahoo reported a 5% decline over the year on Wednesday, which the company attributed to its search revenue sharing deal with Microsoft. Yahoo hands over 12% of its search advertising revenue to Microsoft, which, in turn, provides the technology underpinning Yahoo's search site. To top of page

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