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Originally published April 19, 2012 at 1:41 PM | Page modified April 20, 2012 at 7:02 PM

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Microsoft beats forecasts on revenue and profit

Microsoft exceeded analysts' estimates for the third quarter of its fiscal year, posting $17.41 billion in revenue, a 6 percent increase year-over-year.

Seattle Times technology reporter

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Despite increased focus on Microsoft's consumers products in recent years, it was corporate customers once again who fueled the company's latest record-breaking quarter.

Businesses buying desktop PCs running Windows and Microsoft's cloud services helped Microsoft exceed analysts' estimates for its fiscal third quarter ended March 31. Microsoft reported the results Thursday.

Those customers helped the Windows division reverse dips in sales in recent quarters, surprising some who had expected revenue to be hampered by a combination of stagnant PC sales, competition from tablets and the expected launch later this year of Windows 8.

Microsoft's broad range of offerings also helped offset a double-digit sales decline in the Entertainment and Devices division, which the company attributed to the soft game-console market.

Overall, Microsoft posted $17.41 billion in revenue, a 6 percent increase year-over-year.

It also reported $5.11 billion in profit and earnings per share of 60 cents, exceeding the Zacks consensus estimate of $17.1 billion in revenue and earnings per share of 57 cents.

And that's before some big product launches expected later this year: Windows 8, Office 15, Windows Phone 8.

The $5.11 billion profit was down from the year-earlier $5.23 billion, and earnings per share slipped a penny from 61 cents last year. But that resulted from a one-time $460 million influx last year related to a partial settlement with the Internal Revenue Service. Excluding that, profit was up $340 million year-over-year and earnings per share rose 7 percent.

Overall, "we're super pleased," said Lisa Nelson, Microsoft's director of investor relations, who added that operating income grew 12 percent as a result of revenue growth and cost-cutting.

Here's how Microsoft's divisions did:

• The Windows and Windows Live unit's revenue rose 4 percent to $4.62 billion, helped by big companies buying both PCs and Windows 7.

Sales of business PCs grew 8 percent, and 40 percent of enterprise desktop PCs are now on Windows 7, Nelson said.

Microsoft also benefited from a PC market that didn't do as badly as some analysts had predicted. Research firm Gartner said this month that PC shipments grew 1.9 percent in the first quarter of 2012, exceeding its earlier projection of a 1.2 percent decline.

Research firm IDC said PC sales were up 2.3 percent for the quarter, exceeding its earlier forecast of a 0.9 percent decline.

• The Business division (which includes Office, Lync, SharePoint, Exchange, Dynamics) reported revenue of $5.81 billion, up 9 percent.

Nelson did not disclose updated figures for the sales of Office 2010 (the company had said several months ago that 200 million Office 2010 licenses have been sold), but said they continue to surpass expectations seven quarters after launch.

She also declined to share numbers on Office 365, the online version of the software, but said there was "lots of momentum there."

• Server and Tools reported revenue of $4.57 billion, a 14 percent increase — its eighth consecutive quarter of double-digit revenue growth.

Nelson said the division showed strength across its portfolio, but singled out SQL Server, with a double-digit growth she declined to put a number to, and Systems Center, with 20 percent growth.

Multiyear licenses from businesses make up 60 percent of the Business division's sales and 50 percent of Server and Tools', according to Microsoft Chief Financial Officer Peter Klein.

That shows that "a lot of companies are buying into Microsoft's product road map longer term," said analyst Sid Parakh with Seattle-based McAdams Wright Ragen. "Which speaks highly of what they've been able to build so far."

While Microsoft's revenues have always leaned heavily on corporate customers, it was "a little more pronounced" this quarter, Parakh said.

• Entertainment and Devices (which includes Xbox, Windows Phone and Skype), did not do so well, with a drop of 16 percent to sales of $1.62 billion. It posted an operating loss of $229 million, compared with a $210 million profit a year earlier.

Nelson attributed that to the softness of the console market as a whole. There was good sales momentum in October and November but that slowed in December, she said.

During the quarter, Microsoft sold 1.4 million Xbox consoles, compared with 2.7 million a year ago. Still, the Xbox remained the country's top-selling gaming console for the 15th consecutive month.

Revenue from Xbox 360 slid 33 percent to $584 million, mainly because of a drop in the number of Xbox 360 consoles and stand-alone Kinect sensors sold, according to Microsoft's 10-Q filing with the Securities and Exchange Commission.

Those declines were partly offset by revenues from Xbox Live, Microsoft's entertainment subscription service.

The amount of time Xbox Live users spend using the console for entertainment instead of gaming "is increasing all the time," Klein said.

Microsoft did not break out revenue or sales figures for Windows Phone or Skype. But the company did say in its 10-Q that the Xbox's decreased revenue was "offset in part by Skype revenue and Windows Phone software-license revenue from Nokia."

In addition, the company said Skype users made 100 billion minutes of calls this quarter, an increase of 40 percent from a year ago.

• Though the Online Services division (which includes Bing and MSN) continues to lose money — $479 million this quarter — it posted a 6 percent increase in revenue to $707 million. And it trimmed losses by $300 million, which Nelson said resulted from increased monetization and cost cutting.

Microsoft shares closed Thursday at $31.01, down 13 cents. In after-hours trading it was up 3.1 percent, to $31.97.

Janet I. Tu: 206-464-2272 or jtu@seattletimes.com. On Twitter @janettu.

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