Deja Vu All Over Again: Microsoft Q3 Rocks, Stock Drops

For the quarter ended March 31, Microsoft's net income rose 36 percent to $5.23 billion, or 61 cents per share, a figure that included a 5 cents per share tax benefit from an IRS settlement. Microsoft's Q3 revenue was up 13 percent to $16.43 billion.

Wall Street analysts polled by FactSet Research were anticipating earnings of 55 cents a share for the quarter on $16.2 billion in revenue. Microsoft shares were down 37 cents to $26.34 in Thursday after hours trading.

Weak PC industry growth was one of the nagging questions hanging over Microsoft going into the call and the Q3 results didn't manage to fully address investors' concerns. There were bright spots: PC sales to businesses rose 9 percent during the quarter and enterprise Windows 7 deployments more than doubled, Bill Koefoed, Microsoft's general manager of investor relations, said in the call.

However, consumer PC shipments dropped 8 percent overall during the quarter, while consumer netbook sales plummeted 40 percent. Overall Windows client revenue dropped 4 percent during the quarter. Although tablets are clearly having an effect, Microsoft CFO Peter Klein noted that Windows revenue was in line with the overall PC market and said the decline stemmed in part from the strength in Windows 7 consumer PC sales during last year's Q3.

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Microsoft has sold 350 million Windows 7 licenses to date and there's plenty of room for that figure to keep growing, as 75 percent of the PC installed base is still running older versions of Windows, according to Klein. Microsoft expects the business PC refresh cycle to continue through 2012.

In a Q&A after the call, Klein and Koefoed were asked why Microsoft's PC business results didn't match that of Intel, whose PC client business grew 17 percent in its Q1. Klein cited several factors, including Intel excluding netbooks in its results and having an extra week in its quarter.

Other parts of Microsoft's business grew at a healthier clip. Revenue for the Microsoft Business Division revenue grew 21 percent, driven by Office 2010 sales that are growing at a rate 10 times faster than that of Office 2007 at a comparable point, Klein said.

SharePoint and Exchange revenue grew double digits, while Lync revenue grew 30 percent. Klein gushed about the "tremendous reaction" Microsoft is seeing for the unified communications product.

Microsoft's Server and Tools division revenue was up 11 percent, driven by double digit growth in Windows Server 2008 R2, SQL Server 2008 R2, and System Center. Microsoft has seen strong Enterprise Agreement renewals for Windows Server 2008 R2 and System Center. The latter is the newest of Microsoft's billion dollar businesses, and marked its tenth straight quarter of double digit growth.

Klein declined to address a question about Microsoft's tablet plans, but said Windows Phone 7 customer satisfaction is north of 90 percent and developers have so far churned out some 13,000 apps, a figure he said will grow much larger as a result of Microsoft's partnership with Nokia.