Besides Windows, other trouble spots at Microsoft

Server and Tools division is the lone bright spot

Windows Vista and XP may shoulder most of the blame for Microsoft's mediocre second quarter results announced Thursday, but few of the software maker's divisions were shining beacons.

Revenue at its Windows client division fell 8 percent due to delayed corporate upgrades of PCs and cannibalization of consumer notebook sales by netbooks installed with Windows XP.

"This quarter's report emphasizes how dependent Microsoft really is on PC sales, despite all its efforts to diversify into new businesses," said Matt Rosoff, an analyst with the independent Directions on Microsoft. "The company must continue to diversify in order to remain strong for the long term."

Problem was, other Microsoft groups were either hammered by a drop in sales or a failure to rein in expenses.

The normally reliable Microsoft Business Division, for example, was hurt by weak PC sales. Profits at MBD, which sells the profit machine known as Microsoft Office, fell 1 percent, dragged down by a US$224 million decrease in consumer sales, primarily due to fewer PCs shipping with copies of Microsoft Office 2007, according to a 10-Q filing by Microsoft to the SEC Thursday.

A $100 million drop in the sale of Zune devices contributed to a 60 percent decrease in the Entertainment and Devices division's operating income, to $151 million. Strong sales of Xbox 360 consoles, however, helped lift revenue 3 percent to US$3.18 billion.

Microsoft's weakest financial performer was its Online Services Business, which continued its money-losing ways. Revenue from Web advertising and subscriptions to services such as Windows Live Hotmail was flat at $866 million in the second quarter, while the loss nearly doubled (91 percent) to US$471 million.

The loss widened in part due to a US$137 million increase in cost of revenue, as Microsoft made payouts to users who tried its Live Search site, which competes with Google's search.

Former Yahoo executive Qi Lu took over this month as new head of the online group.

Microsoft's lone bright spot was its Server and Tools division, where sales were up 15 percent year-over-year to US$3.74 billion.

The Server and Tools unit, which includes enterprise software products Windows Server and SQL Server, is headed by longtime Microsoft executive Bob Muglia, who was recently promoted to president.

Microsoft still reported profits and revenues that would be the envy of almost any tech firm, especially in these economic times. Its operating profit was $5.94 billion on total revenue of US$16.63 billion. Revenue was up 2 percent year-over-year while operating income was down 8%.

The company is still reining in expenses, however, by trimming its 96,000 headcount by 2,000 to 3,000 over the next 18 months, including 1,400 layoffs being announced Thursday.

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Eric Lai

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