Microsoft’s quarterly profits topped Wall Street’s expectations, thanks in part to growth in the company’s server and business software divisions, but the company’s Windows unit continued to feel the effects of a sluggish personal computer market.

The company’s revenues for its fiscal second quarter, ended Dec. 31, were $20.89 billion, up 5 percent, according to results released by Microsoft this afternoon. Earnings per share were 78 cents, beating by 2 cents the consensus of analysts polled in advance by Thomson Reuters.

Microsoft had signaled potential trouble for the Windows division in advance of the earnings release, based in part on the flooding in Thailand that has impacted manufacturers of hard drives, affecting the PC supply chain. Microsoft says it believes the overall PC market decreased by 2 percent to 4 percent, including the impact of the Thailand floods.

At the same time, the rise of the iPad has been taking a toll on Windows PCs on the lower end, particularly in the netbook market. Revenue in the Windows & Windows Live Division was down 6 percent, to $4.7 billion.

In the Entertainment & Devices Division, Microsoft saw revenue rise to $4.2 billion, up 15 percent,as sales of the Xbox 360 climbed, reaching 8.2 million units for the quarter, compared with 6.3 million units in the same quater the previous year. However, the division’s profits fell 21 percent, to $528 million.

Microsoft cited a variety of factors for that decline in E&D profits, including the cost of integrating Skype following the completion of that acquisition, payments made to Nokia related to Windows Phone strategic initiatives, higher Xbox Live royalty costs, and a higher mix of Xbox 360 hardware sales vs. software, which takes a toll on the company’s profit margins.

In the Online Services Division, Microsoft’s revenue rose 10 percent, to $784 million.

The division is still deeply in the red, with a quarterly loss of $458 million. However, that was an 18 percent improvement over the $559 million loss posted in the same quarter a year ago. Microsoft is citing factors including the growth of Bing — now the No. 2 search engine, behind Google — and the rollout of its Yahoo partnership.

The Microsoft Business Division, which includes the Office products, saw revenue increase by 3 percent, to $6.3 billion, while operating profit was up 2 percent, to $4.2 billion.

Server & Tools, home to products including Windows Server and SQL Server, continues to quietly fuel the company, with revenue rising 11 percent to $4.8 billion, and profits up 17 percent, to nearly $2 billion.

Microsoft’s earnings call starts at 2:30 p.m., and you can listen via this page.

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  • Guest

    It’s actually pretty bad.  Windows profits sank, but E&D contribution went down as well, when these should be the fat times so far as xbox is concerned.  That may all be due to WP7, but if so, well, that’s a pretty huge hit to be taking.

    • Guest

      Yeah, it’s terrible. Management won’t even acknowledge why Windows sales fell so much more than PC sales. Estimates reduced across the board. Formal acknowledgment that “competing form factors” are taking share from PCs. E&D revenue up but profit down. Online still not growing like it should. RPS still unsolved years after the partnership with Yahoo. Basically no credible strategy for growth. Just lots of excuses for what is has now clearly been revealed at a decade of mistakes and ultimately a failed strategy. Apple larger and still growing at 70%. MS growing less than 5%.

      Fire Ballmer. Fire the board. Start over.

  • Guest

    Congratulations to Microsoft on beating estimates with another killer quarter!

    • Not_an_MSFT_fan

      What a surprise, an MSFT fanboi. No matter how hard you try to spin reality, the facts speak for themselves: there are some serious cracks in MSFT’s foundation. Margins at Server & Tools suck and growth is lacklustre. No wonder with all those Linux powered clouds out there. And even if you didn’t move to a cloud and did your own infrastructure with your own app servers then it still would be Linux powered. Open Source Application servers have something like 90% of the market. Only an idiot would buy a second rate solution instead of going with what almost the entire market uses.

      Then there’s Skype and the billions and billions it cost which seems to be a write off cause I don’t see anything coming out of that deal. Do you? And no, future MSFT products don’t count.

      Then there’s Windows and it’s failing. Who needs an expensive Windows license when you can have an ultrabook or tablet with Android.

      Finally the Online Services Division. More than 1 billion losses and that’s just counting the last 2 years. Many more billions before that. Wow. That’s just ridiculous. And Bing number 2? Let’s be real: Bing is so far behind Google that Google can’t even see them in their rear-view mirror. It’s another typical MSFT ego product. They just can’t accept Google’s success so they will continue to poor in billions and billions so they can say they compete. Right. How about shutting down all those failing projects and return the savings to the shareholders. How’s that for an idea?

      • Guest

        Windows is popular in the enterprise.

        Skype will be used. Future Microsoft products count.

        Ultrabooks run Windows.

        Bing, coupled with Yahoo! (which uses Bing), is 30% of the search market and growing.

        If you want to shut everything down and get a little sprinkle of cash, sell your Microsoft stock and invest in a savings account. If you want to fund innovation, keep on.

        As you have not made any points that are discussable beyond two-sentence refutations, this thread is closed.

        (Not a Microsoft employee, not a Microsoft stockholder.)

        • Guest

          “Windows is popular in the enterprise.”

          But recently losing its lock there to iOS and Android.”Skype will be used. Future Microsoft products count.”

          Sure it will. Because MS has never paid too much for someone and then ended up mothballing it.”Ultrabooks run Windows.”

          Windows has lost share every quarter since the launch of Vista. Ultrabooks may help slow the bleed to iPads and MBA’s, but it won’t stop it. “Bing, coupled with Yahoo! (which uses Bing), is 30% of the search market and growing.”

          And has only cost MS more than $8 billion in losses so far, with Google losing only about a point of share total and even then only in the US market, one of its weakest.
          “If you want to shut everything down and get a little sprinkle of cash, sell your Microsoft stock and invest in a savings account. If you want to fund innovation, keep on.”

          Yeah, because spending more than Google and Apple combined on innovation for more than a decade has resulted in…oh right, a 50% haircut in the stock price. “As you have not made any points that are discussable beyond two-sentence refutations, this thread is closed.”

          Pot, meet kettle.”(Not a Microsoft employee, not a Microsoft stockholder.)”

          The last part is the only halfway intelligent thing you said.

  • Nathan Ottenson

    Don’t think MSFT is stressing.  Windows 8 is going to be their answer to tablet maket.  They just have to get it out before everyone who is interested settles for an android or ipad

  • Guest

    Apple’s quarterly revenue was more than double Microsoft’s revenue from the same quarter.

    “I love our strategy. The board loves our strategy”

    -Steve Ballmer

  • Guest

    Any more proof needed that MS is in trouble and that their “growth strategy” has been a abject failure?

  • Bob

    Remind me again why Ballmer hasn’t been fired? He’s lost half the company’s market cap, it’s growth, lock on developers, lock on the enterprise, and position as the dominant technology company. He frittered away a ten year lead in smartphones and tablets. He was wrong about iPhone, iPad, Android, and the challenge of catching Google in search. He was wrong about the prospects for virtually every new MS initiative or acquisition. The company is now strategically screwed for the future relative to either Apple or Google. Seriously, why isn’t he and the board gone?

    • Guest

      Because he’s Bill’s buddy and the rest of the board is too scared to overrule Gates.

  • mom

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