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Microsoft halves R&D spending, posts record profits

MSN, Xbox in the black

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Microsoft recorded its highest-ever profits in the last quarter of 2004 (FY 2Q 2005), with net income doubling from $1.5bn a year ago to $3.46bn in the most recent quarter's earnings.

Revenue was up slightly to $10.8bn from $10.15bn in the last three months of 2003. But belt-tightening measures - which included halving Microsoft's R&D outlay, saw the company's net income rocket. Research and development expenditure fell from $2.97bn a year ago to $1.437bn in the most recent quarter. The company also found savings on cost of sales of around $420m, and around $700m in lower from sales and marketing and general expenses costs.

Microsoft said that its home division - which includes Xbox - turned a profit for the first time, as did MSN. Home and Entertainment turned a $397m loss into a $84m profit in the past quarter, on revenues of $1.46bn, $140m higher than last year. Microsoft cited the launch of Xbox live and the game Halo 2, in the Christmas season, with almost one in three Xbox owners snapping up a copy of the game.

However CFO John Connors said that this was a Halo-powered one-off. He warned that Home and Entertainment would lose money in the forthcoming quarter, and said he didn't expect it to make a steady profit until fiscal year 2007.

MSN turned a $130m profit on revenues of $588m. The Mobile and Embedded division, responsible for everything from ATMs to smartphones, is almost in the black: recording a $4m loss on income of $9m.

Boosted by Windows 2003 and Exchange 2003 servers, the Server and Tools division saw income rise by $477 million over the same period last year, to $2.52 billion, of which $913 was clear profit.

But as ever, the divisions responsible for the Windows desktop client and Microsoft Office, the latter Microsoft calls "Information Worker" - remain the breadwinners. The Office division cleared a cool $2bn profit in quarter for the first time on revenues of $2.77bn. Client recorded a net income of $2.53bn, up from $2.095bn in the same period last year, on revenues of $3.22bn, up from $3.059bn. ®

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