Microsoft Gains on Servers and Xbox, But Ad Sales Drop

Microsoft revenue rose 11 percent over last year, led by enterprise server sales and Xbox gaming business, but online ad sales fell 4.4 percent to $539 million in revenue for the quarter

Overall revenue rose to $10.81 billion for its fiscal first quarter, which ended September 30. Net income for the quarter rose similarly to $3.48 billion, or $0.35 per share

Microsoft’s advertising efforts, housed in a newly formed Online Services Group within the Platform Products and Services Division, generated $539 million in revenue for the quarter, 4.4-percent less than the $564 million a year ago. Display ad sales were up slightly, while search revenue was lower in the quarter despite modest query growth.

In contrast, Google, whose revenue is made up almost entirely of ad sales, brought in $2.69 billion in revenue last quarter; while Yahoo, in a “disappointing” quarter, brought in $1.37 billion in marketing services revenue.

The vast majority of Microsoft’s revenue continues to come from software. Its Business division, which includes the Information Worker Group, the Microsoft Business Solutions Group, and the Unified Communications Group, brought in $3.4 billion in the quarter, up 4.3-percent over the year before. In the Platform Products and Services Division, its Client Group brought in $3.3 billion, up 4.5 percent, and its Server and Tools Group brought in $2.5 billion in revenue for the quarter, a 17.5-percent gain. The Entertainment and Devices division, which houses the Home and Entertainment Group and the Mobile and Embedded Devices Group, brought in $1.0 billion, a 70.0-percent increase over the year before.

The company is upbeat about its Online Services business, with sequential growth in the number of search queries and revenue-per-search quarter-to-quarter, despite lower search pricing that resulted from the transition of advertisers onto the adCenter platform, said Chris Liddell, SVP & chief financial officer at Microsoft.

“We’re close to lapping where we were when we came off Overture last year,” Liddell said during a conference call with investors Thursday. “We expect, at least in the U.S., to exceed revenue-per-search year-to-year, not just quarter-to-quarter, in the second half.”

For display advertising, volume and monetization are “reasonable,” and Liddell said he expects them to be even better second half.

Microsoft has been expanding its ad services for the past year, since it began refocusing its business on advertising a year ago. During that time, it has continued to develop its adCenter platform, launch the Live.com portal, and set up a new online business group, with MSN honcho Yusuf Mehdi heading it up as chief advertising strategist.

In September, Microsoft rebranded its ad sales operations as Microsoft Digital Advertising Solutions. Its goal is to bring together various ad products and services into a coherent offering for advertisers.

Microsoft expects to bring in between $11.8 billion and $12.4 billion in revenue for the second quarter, which ends December 31, and expects earnings per share between $0.22 and $0.24 for the same period. For the full year, which ends June 30, 2007, Microsoft expects revenue in the range of $50.0 billion to $50.9 billion, and earnings per share in the range of $1.43 to $1.46.

Online Services revenue is expected to grow 3 to 5 percent next quarter, and 7 to 11 percent for the full year.

The company is launching a multi-channel ad campaign promoting its Windows Live Search to consumers. An online campaign will include media buys on publisher sites like the Wall Street Journal Online, NBC.com, Space.com and Billboard.com, as well as Microsoft’s own content sites. Space will also be purchased on ad networks.

A print campaign includes full-page ads in several newspapers, including the New York Times, Wall Street Journal, USA Today, as well as Seattle and Bay Area papers.