Microsoft released earnings yesterday in a rise of 11 percent in revenue and operating income. What's interesting, and both Todd Bishop and Mary Jo Foley point out, is that buried in the 10Q is the fact that online services profit fell because of a 40% increase in headcount, as well as data-center infrastructure costs.
OSB operating income decreased for the three months ended September 30, 2006, reflecting the decline in revenue, increased headcount-related costs primarily as a result of continued investments in Windows Live, adCenter, and other properties, and increased cost of revenue as a result of the build out of our data center infrastructure. Headcount-related costs increased 43%, reflecting both an increase in salaries and benefits for existing headcount and a 40% increase in headcount.
It's clear that Microsoft is taking a big interest in online services through MSN and Windows Live, both by the products and services they produce, and the financial statement as well. Back in May for the MSN Strategic Account Summit, Ballmer mentioned the increase in spending to advertisers, clearly stating to them that Microsoft means business.
We will spend as a company overall about $6.2 billion in R&D. We have told our R&D folks that our number one priority, number one priority is software as a service, which really relates to this notion of the kinds of experiences that I talked about for the digital my style, if you will.
We're investing behind that very specifically though also in online. Our R&D spend just in our online MSN area has gone from a 500 million in our fiscal year '05 to a projected $1.1 billion in our fiscal year '07, which starts July 1. I think we surprised some in the financial community with some of this last week, and our stock showed that surprise, but our dedication and determination to invest in important ways in this business is strong. And we will invest as much in this online opportunity in R&D as any of the other big players in the market, let alone the rest of our $5.1 billion, the rest of the $6.2 billion total of R&D spend.
More highlights from the conference call:
Revenue for our Online Service business was down 4% to $539 million, with 5% advertising growth and a 30% decline in access revenue. Increased advertising revenue was driven by growth in display advertising, offset by lower search revenues. With respect to search, although our search queries grew, our search pricing was below the prior-year levels as a result of the transition to our new adCenter platform, which began in earnest during the December quarter. We experienced sequential growth in revenue per search as we increased the number of advertisers on our platform. During the quarter we also released a number of new or updated Internet services, including Live.com, Live Search, Live Local Search and Live Spaces.
We forecast revenue in the Online Services business to grow between 7% and 11% for the year and to be up 3% to 5% in quarter two. The full-year growth number implies significant year-over-year growth in the second half, based upon growth in both search and display advertising revenues. While we continue to make investments in various aspects of the business, we did make progress on a number of fronts in the quarter. For example, we rolled out the Live Search, which now powers searches on both MSN.com and Live.com, moved our Live Local Search out of beta and into final availability in both the U.S. and the UK, continued to grow and broaden our social networking presence with spaces and the recent beta rollout of Soapbox, and we're making good progress getting advertisers on adCenter, as well as looking at opportunities to extend our reach through partnerships.
It seems Microsoft is really committed to the online services business unit, and Ballmer is going to see to it. With fierce competition from Google and Yahoo!, this is going to be a tough race, which leads to more innovation.