Windows 7 claims 40 percent desktop market share; Xbox 360 is top U.S. console for 15th month

Microsoft Corp. (MSFT) is taking some big risks on the market.  As a company long blasted for not pushing the bounds of user interface development and operating system functionality far enough, Microsoft has thought wildly outside the box to come up with truly unique user interfaces such as the Metro UI driven Windows Phone 7 and Windows 8.  The latter product will be a key test for Microsoft when it launches later this year.  The company faces the uneviable task of fulfilling conflicting objectives -- delivering a crisp, innovative experience suitable for tablets and desktops alike, while at the same time maintaining or improving on the core traditional desktop experience.

I. A Bullish Surprise

Whether Microsoft will rise sufficiently to the occasion remains to be seen, but the calendar Q1 2012 (fiscal Q3 2012) earnings reported [press release] late yesterday afternoon by Microsoft give cause for optimism.

Microsoft's core money-makers -- Windows 7, Xbox 360, SQL Server/System Center, and Office 2010 -- all posted impressive numbers.  As a result Microsoft posted revenue of $17.41B USD and a net profit of $5.11B USD ($0.60 USD per share).  The revenue was up 6 percent from last year, but profits were down one cent per share from last year, thanks in part to Microsoft's heavy spending.  

But the key thing is that Microsoft blew past analyst expectations of revenue $17.176B USD and net profit of $0.5748 USD per share.  In fact, Microsoft's earnings nearly matched the most bullish of analyst estimates.

Ballmer crazy excited
Microsoft beat analyst estimates. [Image Source: Jim Wilson/The New York Times]

Windows 7 continues its meteoric rise as the world's fastest growing operating system in history, claiming a 40 percent market share.  Sales rose to $4.62B USD, up 4 percent from last year.  SQL Server and System Center followed in suit, with the former growing by "double digits" and the latter growing 20 percent.  Overall the server division raked in 14 percent more than last year, for a total of $4.57B USD.  Office 2010 sales continued strong, driving $5.81B USD in revenue -- a 9 percent increase.

Xbox 360 sales fell 16 percent on a year-to-year basis, but Microsoft was able to hang on to its lead in U.S. console sales for a fifteenth straight month.  Xbox Live now has 40 million members worldwide, and the division pulled in $1.62B USD.

II. Outlook

Two big questions face Microsoft -- how to reinvent the winners (Windows, Office, Xbox) and how to salvage the losers (Bing, Windows Phone).  

In the winners department, Microsoft is rumored to be preparing the Xbox 360's successor for a fall 2013 launch.  Code-named Durango, rumor has it that Microsoft is handing out development kits based on a 16-core PowerPC architecture central processing unit from International Business Machines, Inc. (IBM) and a Radeon 7000 series card from Advanced Micro Devices, Inc. (AMD).  The device will need all that power; it is supposed to launch alongside a next generation Kinect (Kinect 2), which will be capable of tracking users' movements down to their fingertips.

The Xbox 360's successor is reportedly code-named Durango and will pack a 16-core CPU.
[Image Source: Cars Domain]

In the losers department, Microsoft is starting to make headway with Windows Phone 7.  After seeing some sales success at last with its launch of the Lumia 900 LTE and device maker Nokia Oyj. (HEX:NOK1V) on AT&T, Inc.'s (T) network, Microsoft received a boost on Wednesday during Verizon's earnings call.

Fran Shammo, CFO and EVP of Verizon Wireless -- a joint venture between Verizon Communications Inc. (VZ) and Vodafone Group Plc. (LON:VOD) -- called Microsoft a key "third ecosystem" that his company hopes to cultivate.

He comments [call], "I do think, though, it is important that there is a third ecosystem that is brought into the mix here, and we are fully supportive of that with Microsoft. And as we said that we created the Android platform from beginning, and it is an incredible platform today that we helped create, and we are looking to do the same thing with a third ecosystem. So that is how I think that we plan to go into the future here."

Verizon Wireless CEO Dan Mead will be a keynote speaker at the May 2012 International CTIA Wireless trade show in New Orleans, Louisiana.  
Nokia PureView
Could Nokia be bringing its Lumia PureView 808 to Verizon Wireless?
[Image Source: Nokia; Modifications: Jason Mick/DailyTech]

I argued in my earnings analysis of Nokia yesterday that it would make the most sense to put the Windows Phone variant of the monstrous 41 megapixel Nokia PureView on Verizon, as soon as possible.  As such a flashy handset, it could convince Verizon to follow AT&T in getting serious about selling Windows Phones.  We'll see what happens, though.

Sources: Microsoft, Verizon Wireless

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