With Apple breezing past Wall Street estimates this week by reporting $15.7 billion in revenue for its third business quarter, the pressure was on Microsoft -- and the software giant delivered. Microsoft said Thursday it earned a record $16.04 billion in revenue during the second quarter, driven by the launch of Office 2010 and strong Windows 7 sales.
With 175 million licenses sold to date, Windows 7 is the fastest-selling operating system ever and now runs on more than 15 percent of all PCs worldwide, Microsoft CFO Peter Klein told financial analysts on a conference call.
"This quarter's record revenue reflects the breadth of our offerings and our continued product momentum," Klein said. In addition to Windows 7, Windows Server and the Xbox 360 video-game console also exhibited strong performance in the quarter even as the software giant's Bing search engine "achieved its 13th consecutive month of share gain," he added.
PC Growth Continues
According to a preliminary estimate from Gartner, worldwide PC shipments rose 20.7 percent year over year to 82.9 million in the second quarter -- slightly above the research firm's earlier outlook of 19.3 percent growth. However, Microsoft told analysts it estimates even higher PC market growth of 22 to 24 percent in the quarter, and with the consumer and business segments growing at roughly the same rate.
"From a geographic perspective, emerging markets remain a significant driver of the PC market with almost twice the growth of mature markets," said Bill Koefoed, general manager of investor relations at Microsoft.
Gartner's PC growth estimate may go up another one to two percentage points once all the numbers for the second quarter are in, noted Mikako Kitagawa, a principal analyst at the research firm. "So our final figure could be low side of their projection," she said. "But consumer growth will be stronger than professional in our projection."
Windows revenue grew more than $1 billion, or 32 percent, in the second quarter, Koefoed noted. "Total OEM license growth was 26 percent and outpaced the PC market for the third quarter in a row," Koefoed told financial analysts. He also observed that the business PC refresh cycle has accelerated, with Microsoft recording its second straight quarter of double-digit business license growth.
Additionally, Microsoft was able to capitalize on the recovery of the server hardware market, Klein said. "Windows Server 2008 R2 has enjoyed strong demand and increased Windows Server market share," Klein explained. "With the launches of Exchange 2010 -- and most recently, SharePoint 2010 and Office 2010 -- we delivered key innovations in our productivity portfolio."
A Business PC Resurgence
Gartner expects professional PC shipments will grow in the next two years due to a PC refresh cycle, especially in mature markets where aged PCs are still in use. "These aged PCs should have been replaced by now, but many organizations delayed replacement because of the unpopularity of Vista and economic uncertainties," Kitagawa said. "With Windows 7's release, these aged PCs are ready to be replaced."
Some analysts are concerned that Apple's iPad will cut into laptop and mini-notebook sales, which could hurt Microsoft. Asked about the potential impact of tablets on the PC market, Klein said Microsoft views this as an additive to the overall market opportunity.
"We think tablets are very interesting and remind us that there are always new scenarios and new opportunities, and we are constantly working with our partners" on multiple scenarios, form factors, and price points, Klein said.
Extrapolating from Apple's Mac sales, Kitagawa thinks Microsoft's share of standard computer shipments worldwide is more than 90 percent. "If you look at revenue share, it may go down a bit as Mac has a much higher system price, plus iPad shipments are not included," Kitagawa said.