Microsoft shares down on lower fiscal Q2 profit

Software reports increase in games revenue, decline in Windows sales

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Shares of Microsoft Corp. (NASDAQ: MSFT) were down slightly in after-hours trading Thursday after the software giant reported a decline in fiscal second-quarter profit.

Microsoft's fiscal Q2 net income was $6.63 billion, or 77 cents a share, down slightly from $6.66 billion, or 74 cents a share, in the year-ago quarter. Revenue was up 5 percent to $19.95 billion from $19 billion.

(Also see: Microsoft shares jump after Q1 earnings report)

Consensus estimates called for earnings of 68 cents a share on revenue of $19.2 billion.

Despite beating expectations, Microsoft's stock after hours was down 24 cents, or 0.83 percent, from Thursday's closing price of 28.63.

The company explained that prior-year results reflect the recognition of $1.71 billion of deferred revenue relating to the Windows 7 Upgrade Option program and sales of Windows 7 before general availability in October 2009.

In a statement accompanying the earnings report, Microsoft chief financial officer Peter Klein said, “The pace of business spending, combined with strong consumer demand, led to another quarter of operating margin expansion and solid earnings per share growth.”

The star of the quarter for Microsoft was its Kinect motion-sensor video game device, which was released before the holiday season and logged 8 million sales. This boosted revenue for the company's entertainment and devices division 55 percent to $3.7 billion from $2.4 billion in the year-ago quarter.

“The 8 million units of Kinect sensors sold in just 60 days far exceeded our expectations,” Klein said.

Microsoft's business unit saw sales climb 22.4 percent to $6 billion from $4.9 billion, with profit rising 38 percent to $4.0 billion from $2.9 billion. This is the unit that sells the company's Office software.

The server and tools division saw revenue rise 10.4 percent to $4.39 billion from $3.98 billion. Net profit for the unit was $1.78 billion, up 21.3 percent from the year-ago quarter.

However, revenue for Redmond's Windows division fell to $5.1 billion from $7.2 billion, a 29 percent drop. Net income from Windows sales was down 39 percent to $3.3 billion from $5.4 billion.

Despite an increase in revenue to $691 million from $579 million a year ago, the company's emerging online services division reported a loss of $543 million, up from the $463 million loss reported a year ago.

Going forward, Microsoft reaffirmed operating expense guidance of $26.9 billion to $27.3 billion for the full year ending June 30, 2011.

Chris Nerney writes about the business side of technology market strategies and trends, legal issues, leadership changes, mergers, venture capital, IPOs and technology stocks. Follow him on Twitter @ChrisNerney.

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