Business / Technology

Despite a decline in sales in the mainstay Windows division and a slight decline in profit, Microsoft posted record revenue during the second quarter of its fiscal year and slightly exceeded analysts' estimates.

Bolstered by sales of the Xbox and products in its Server & Tools business, Microsoft reported $20.89 billion in revenue for the quarter ended Dec. 31, a 5 percent increase from the year-ago period.

The company marked $6.62 billion in profit, down slightly from $6.63 billion a year ago.

Earnings per share reached 78 cents, exceeding analysts' estimates of 77 cents — the same as in the year-ago quarter.

Microsoft has essentially become one company with four cash cows: its Business division (which includes Office), Server & Tools business, Windows, and Entertainment & Devices division.

"It was a good quarter despite the fact that challenges in Windows continue," said Sid Parakh, an analyst with McAdams Wright Ragen. "It's good to see that other divisions can deliver. It basically shows strength across the board."

Still, some of the divisions — including Server & Tools and Entertainment & Devices — are lower-margin businesses than the Windows divisions, said Josh Olson, technology analyst with Edward Jones.

"I think they do need to restake their claim in the Windows business with Windows 8," said Olson, referring to the upcoming iteration of Microsoft's flagship operating system.

Indeed, investors are likely looking forward to the upcoming product cycle, with the Windows 8 beta version being released in late February, new Windows Phones launching soon, the Nokia-Microsoft partnership revving up with the high-end Lumia 900 and Skype being more integrated into Microsoft's offerings.

Microsoft execs, in a conference call with analysts Thursday, didn't go into details about future plans.

They said, in general terms, that Microsoft was working with developers to create a strong ecosystem for Windows 8 and its accompanying Windows Store.

Regarding Skype, Bill Koefoed, Microsoft's general manager of investor relations, said: "Teams are working closely on integration across Microsoft and we will share more as we get further along the road map."

Here's how the various divisions did in the second quarter:

• The Windows and Windows Live division posted revenue of $4.74 billion, down 6 percent from a year ago.

Microsoft had warned analysts earlier this month that PC sales would likely drop faster than expected in the second quarter, particularly because of floods in Thailand. Because factories in Thailand make a substantial portion of the world's hard drives, fewer PCs are manufactured when there are fewer hard drives, resulting in fewer copies of Windows sold.

Some research firms did not show a steep drop in PC shipments, however. Gartner estimated worldwide PC shipments had declined 1.4 percent in the fourth quarter of 2011 compared with the year-ago period. Another research firm, IDC, put the decline at 0.2 percent.

Despite the drop in Windows revenue, Windows 7 continued its momentum, with some 525 million Windows 7 licenses sold, according to Koefoed.

• The Business division, which includes Office, Lync, SharePoint, Exchange and Dynamics, reported $6.28 billion in revenue, up 3 percent from a year ago.

Microsoft notes that the revenue figure marks a 7 percent increase from the year-ago period, excluding the previous-year recognition of $224 million of deferred revenue related to the Office 2010 technology-guarantee program.

Enterprise spending continued to sustain the Business division and Microsoft executives noted that Lync, SharePoint, Exchange and Dynamics CRM and ERP each grew in the double digits.

• The Server & Tools business posted $4.77 billion in revenue, up 11 percent. Lisa Nelson, Microsoft's director of investor relations, attributed the growth to "strong demand from CIOs as they think about transitioning their businesses to the cloud."

There was double-digit growth in the Windows Server and SQL Server premium editions and more than 20 percent growth in System Center revenue.

• The Entertainment & Devices division posted revenue of $4.24 billion, up 15 percent.

"We had a record holiday season," Nelson said, with about 8.2 million Xbox 360 consoles sold in the quarter — a growth of 25 percent year over year.

Xbox was the No. 1 game console in the U.S. in 2011; in December, it had 46 percent of the market.

The installed base for Xbox 360 is now 66 million, and there are 40 million Xbox Live users worldwide — up 33 percent from a year ago. Kinect, Microsoft's motion- and voice-controlled sensor, now has an installed base of 18 million, Nelson said.

Chief Financial Officer Peter Klein noted, though, that the console market is "softer than we expected," and said he expected revenue for the division to grow in the high single digits in the third quarter and in the midteens for the fiscal year.

• The Online Services division reported revenue of $784 million, up 10 percent. While the division — which includes Bing — is still losing money, the losses have narrowed. In the second quarter, the division lost $450 million, compared with a $550 million loss this time last year.

Nelson attributed that to the work Microsoft and Yahoo are doing to improve revenue per search. "It's still a loss but it's definitely a step in the right direction."

Microsoft shares closed Thursday at $28.12, down 11 cents. But in after-hours trading it was up 71 cents, or 2.5 percent, to $28.83.

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