Microsoft said revenues in its fiscal 2011 second quarter increased 5% year-over-year to come in at $19.95 billion, handily beating Wall Street estimates and setting a quarterly sales record for the company. Analysts were expecting total sales of $19.15 billion.
Microsoft said strong demand for its Xbox Kinect gaming system and Office 2011 productivity suite helped fuel the gains. But Windows, the company's flagship operating system, saw only meager growth during the period as many consumers opted for tablets over traditional PCs during the holiday shopping season.
Operating income slipped 4%, to $8.17 billion. But the figure actually represents a 20% increase over the same period a year ago if the effects of a Windows 7 upgrade program that saw Microsoft defer Windows sales in the first quarter of fiscal 2010 until Q2 FY2010 are excluded.
Earnings per share came in at $0.77, well above analysts' expectations of $0.68.
"The pace of business spending, combined with strong consumer demand, led to another quarter of operating margin expansion and solid earnings per share growth," said Microsoft CFO Peter Klein, in a statement.
Windows division sales totaled a disappointing $5.05 billion. Analysts at Goldman Sachs were looking for Windows revenue of $5.25 billion while Caris & Company expected Windows revenue of $5.37 billion.
Data released Wednesday by Catalyst showed that shipments of Apple PC products surged 241% over the last three months, driven largely by iPad sales. The iPad and Google Android-powered tablets are believed to be taking a big bite out of sales of traditional, Windows-based PCs.
Revenues at the Microsoft Business Division, which covers the Office line of products, increased 24%, to $6.03 billion, as consumers and businesses embraced Office 2010, which includes access to cloud-based versions of Word, Excel, and PowerPoint.
Server & Tools revenue grew 10%, to $4.39 billion, as Windows Server 2008 R2 continued to gain share and multi-year licensing revenues increased 11%. Online Services revenues, meanwhile, jumped 19% to $690 million as Microsoft's search alliance with Yahoo kicked in fully.
The biggest winner in Microsoft's stable was the company's Entertainment and Devices Division, which is home to the Xbox gaming system and related hardware. EDD revenues were up 55% year-over-year in the second quarter, to $3.7 billion, as Microsoft shipped more than 8 million Kinect units in 60 days. Kinect, launched in November of last year, provides users with hands-free control over compatible Xbox 360 games.
"We are enthusiastic about the consumer response to our holiday lineup of products, including the launch of Kinect," said Klein.
Microsoft also reaffirmed operating expense guidance of $26.9 billion to $27.3 billion for its current fiscal year, which ends June 30. Microsoft shares were down .83%, to $28.63, in after hours trading Thursday as investors mulled the company's earnings report.