Only three business units make money for Microsoft

Four of Microsoft's seven business divisions lost money in the most recent quarter, according to financial statements the company filed last week.

In the routine filing with the Securities Exchange Commission, the company also revealed Windows desktop profit margins were as high as nearly 86 per cent.

Losses in the four divisions cast a shadow over Microsoft's fiscal 2003 first quarter, ended 30 September, despite volume licensing changes that helped boost revenue 26 per cent. Profits from Windows desktop and Office, which in their respective categories have more than 90 per cent market share, accounted for most of Microsoft's profits, according to the filing.

The SEC filing, called a 10-Q, offers the most detailed insight to date on exactly where Microsoft makes money. Despite Microsoft's attempts to expand into new markets, the company remains heavily dependent on Office and Windows.

The business units making up Windows and Office brought in $4.88bn in profits for Microsoft. But $830m in losses for the four other divisions reduced earnings to $4.05bn, according to Microsoft's 10-Q.

"For Microsoft, this shows there are some businesses that are almost start-ups for them," Gartner analyst Michael Silver said. "Those businesses are basically funded by Windows and Office."

Microsoft's first-quarter results reflect a recent reorganisation of the company's business units, with some groups breaking out revenue and profits for the first time. Under the old structure, Microsoft reported revenue for desktop applications, desktop operating systems, enterprise software, and other divisions. But the older organisation of business units made it more difficult to discern the extent of operational weaknesses and strengths.

Under the new structure, Microsoft reports revenue and profits for seven divisions: Client, Information Worker, MSN, Home and Entertainment, CE/Mobility, Server Platforms and Business Solutions.

The Client group includes desktop and embedded operating systems Information Worker is made up of Office, other standalone applications, and professional product support MSN refers to the online network and access services Home & Entertainment includes the Xbox game console, consumer hardware and software, PC online games, and TV technology CE/Mobility refers to mobile devices Server Platforms is made up of server operating systems, .Net servers, developer tools, premiere support and consulting, training certification, and Microsoft Press books and Business Solutions includes Great Plains, bCentral and Navision.

For the first quarter, the Client, Information Worker and Server Platforms groups pulled in profits of $4.88bn. The two desktop groups - Client and Information Worker - brought in $4.36bn in profits.

"Windows and Office still remain the cash cows," Silver said. "This shows why Microsoft is afraid of Linux and StarOffice - because they threaten these cash cows and the means of expanding into new business opportunities."

By contrast, MSN lost $97m on $531m in revenue Home and Entertainment lost $177m on $505m in sales and Business Solutions lost $68m on $107m in sales. The CE/Mobility Group, which includes Pocket PC and Microsoft cell phone software racked up $33m in losses on sales of $17m.

Joe Wilcox writes for News.com