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Microsoft profits dip despite record sales

Microsoft has credited strong enterprise-driven demand and the introduction of Windows 8 and other new products for record sales numbers in the software giant's fiscal second quarter.

"Our big, bold ambition to re-imagine Windows as well as launch Surface and Windows Phone 8 has sparked growing enthusiasm with our customers and unprecedented opportunity and creativity with our partners and developers," Microsoft CEO Steve Ballmer said in a statement.

"With new Windows devices, including Surface Pro, and the new Office on the horizon, we'll continue to drive excitement for the Windows ecosystem and deliver our software through devices and services people love and businesses need," added Ballmer, who did not participate in an earnings call with analysts and investors on Thursday.

Microsoft reported second-quarter revenue of $21.5 billion (£13.6 billion), up nearly three per cent from the $20.9 billion (£13.25 billion) in sales generated in the same period a year ago. But operating income of $7.77 billion (£4.9 billion) declined three per cent year-over-year and its profits - $6.38 billion (£4 billion), down four per cent - and EPS - $0.76 per share (48p), down $0.02 (1p) - also slipped.

Among its business units, the big year-over-year gainers were Microsoft's Windows Division - $5.88 billion (£3.7 billion) in revenue, up 24 per cent from Q2 2012 - and its Server & Tools business - $5.19 billion (£3.3 billion), up nine per cent.

The numbers for its Windows business were particularly interesting, according to Moor Insights & Strategy analyst Patrick Moorhead, who said it's been difficult at times to reconcile what Microsoft has been saying about the uptake of its new Windows 8 and Windows RT operating systems with what some of its biggest hardware partners have been reporting.

"Their numbers look good but what is relevant is hard to get underneath. PC OEMs and chipmakers talk of struggles with Windows 8 and RT but Microsoft is indicating all is well. Something doesn't compute here," Moorhead said. "The reality is that Microsoft did a good job incenting touch-based device demand but there wasn't enough supply. OEMs didn't get enough good info early enough and they weren't prepared."

Speaking to analysts, chief financial officer Peter Klein and other executives emphasised Microsoft's integration of acquisitions like Skype and Yammer in its portfolio of products for the enterprise, as well as the coming rollout of upgraded products for businesses like its new cloud-optimised Office platform.

But while Microsoft may have a lot of enthusiasm for coming opportunities with business customers, in the just-concluded quarter its Business Division saw a 10 per cent decrease in sales from the year-ago period. Redmond did qualify those numbers by saying its Office Upgrade offer and pre-sales affected its financial reckoning for the quarter, however, and that its Lync, SharePoint, and Exchange offerings continued their trends of double-digit growth.

Jack Gold, principal analyst for J. Gold Associates, found the performance of Microsoft's business-facing portfolio to be weaker than he had anticipated, though he added that "despite all the doom and gloom, Windows did pretty well," helped along by the company incentivising upgrades to Windows 8.

"I thought they would have a good year selling server licenses but this indicates that businesses have still not increased their upgrades and expansion plans, especially around Office upgrades. If they can't pick up some momentum here, Microsoft might have a difficult couple of quarters coming up," Gold said.

Another sore spot for Microsoft was its Entertainment and Devices Division, which had revenue of $3.77 billion (£2.4 billion), down 11 per cent from 2011, even as the company's Xbox remained the top-selling video game console in the US. Windows Phone sales also fall under this division and early indicators suggest Microsoft's new Windows Phone 8 platform has taken off as yet.

"Xbox, WinPhone, etc. are still not generating enough revenues to keep the business growing. This is a trouble spot for Microsoft, which needs to accelerate revenues here," Gold said, adding that 11 per cent sales growth for the company's Online Services Division was encouraging as Microsoft squares off against companies like Google, Apple, and Amazon.

Ultimately, the analyst had a tough prescription for Microsoft vis-à-vis its mobile device business, recommending that Redmond "either get the pace up on growth or start thinking about exiting some of these markets."