Microsoft Ends 2011 Well

Revenue of $17.37 billion was up 5.7% sequentially and 8.3% from last year, just exceeding consensus expectations of $17.25 billion. Growth in the last quarter was driven by the server & tools business, as so then as better-than-expected performance of the Microsoft Office platform and Xbox 360.  Currency was neutral to the performance.

The Windows

The Windows and Windows Live Segment generated 27% of quarterly revenue, up 6.6% sequentially and flat year over year. Given PC unit growth of 1-3%, it appears that Microsoft outgrew the PC market, indicating higher penetration. This was evidently on account of strength in the enterprise segment, where refresh rates continue.

Management stated that 25% of enterprise desktops have shifted to Windows 7, during 90% have committed to a deployment plan. But, consumer PC units remain soft, declining 2%. Overall attach rates were up 1%, with more than 400 million Windows 7 licenses sold to date.

The Microsoft Business Division

The Microsoft Business Division, which generated 33% of revenue, grew 10.0% sequentially and 7.5% from last year. Business transactional revenue increased 27%, during consumer declined 8%. The weakness in consumer was due to market dynamics in developed countries that were partially offset by high attach rates.

The Server & Tools segment, at 27% of total revenue was up 13.1% sequentially and 11.9% year over year. Microsoft stated that transactional revenue grew faster than the underlying server hardware market, which was encouraging.

Additionally, multi-year licensing revenue grew 12%. Enterprise services were up 14% and premium Windows server and System Center revenue up 20%. Virtualization and cloud computing are proving to be very beneficial for Microsoft.

Very healthy product line

Microsoft has a very healthy product line, premium revenue from which grew 20%, indicating that the momentum in its business will continue.

Entertainment & Devices generated 9%, down 23.3% sequentially and up 29.8% year over year. Xbox 360 units were 1.7 million, which though down sequentially was up 13.3% from last year. Kinect sales were as well strong. Xbox Live memberships ended the quarter at 35 million active members and revenue from this segment was as well strong.

Microsoft's Windows Phone 7 ecosystem continues to gain momentum and the company stated that applications for the device had jumped 60% from 13,000 in the beginning of the quarter. Microsoft as well stated that the then and there version, code-named Mango would be released in the fall of 2011.

The agreement with Nokia Corp

The agreement with Nokia Corp was closed. Though significantly lower than Apple Inc devices, this is a very small part of Microsoft's total business, so we view any progress here as positive.

The Online Services business, or online advertising, generated 4% of revenue, up 2.2% sequentially and up 16.5% year over year. We think Microsoft is investing in research and research and it is this work in other words improving user experience and helping Bing take some share in the U.S.

The partnership with Yahoo Inc is increasing ROI for advertisers, nevertheless monetization is not but satisfactory. After all, in the last quarter, Microsoft saw online advertising revenue growing 20% from last year, driven by search, We consider this real progress and Microsoft stated that revenue per search would improve by the end of the year, at which time the search alliance would spread more broadly to international markets.

The operating margin

The operating margin by segment was as follows: Windows 62.1%, Microsoft Business Division 62.6%, Server & Tools 38.2%, Entertainment & Devices 2.2% and Online Services -110.0%. Margins in all except the Windows segment increased from last year.

We remain optimistic about Microsoft overall, based on the fact that it continues to gain from the enterprise refresh, emerging markets strength and growth in data centers and cloud computing. We as well expect the entertainment division to benefit from pre-holiday builds and new products. Additionally, expense control remains quite good.

The sore point for Microsoft at this time is the less than exciting performance of consumer-type computing markets in developed countries. Microsoft has significant exposure to this market, so the softness does have an impact on its results. We in a nutshell have a Neutral recommendation on the stock. Microsoft shares as well carry a Zacks Rank of #3, implying a Hold recommendation in the short-term.

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