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Questions linger after Microsoft reports earnings

Sales of Windows 8 helped earnings, but it remains to be seen whether the new OS is a success.

By Caitlin Mcgarry, PC World
January 25, 2013 12:32 PM ET

PC World - We still don't know how many Surface RT tablets Microsoft sold to close out 2012. But the Windows reboot and its associated hardware helped the tech giant rake in record revenues of $21.46 billion in its fiscal second quarter which ended Dec. 31.

[RELATED: Further thoughts on Microsoft's future]

Microsoft on Thursday reported few surprises in its second-quarter earnings call. The 4 percent slip in profit, from $6.62 billion, or 78 cents per share, down to $6.38 billion, or 76 cents per share, was in line with analyst expectations.

Revenues in the Windows Division jumped 24 percent to $5.9 billion, despite talk of disappointing Surface sales. Microsoft has sold more than 60 million Windows 8 licenses so far (which is unrelated to sales of devices built for Windows 8), which the company says is a faster adoption rate than Windows 7 saw three years ago.

But Microsoft's report left a few questions unanswered.

How well is the Surface selling? The exact number of tablets shipped remains a mystery. During the company's earnings conference call Thursday, Microsoft chief financial officer Peter Klein said the Windows Division saw a 40 percent increase in non-OEM revenue on sales of Windows 8 and Surface RT.

The Surface RT tablet, the company's first piece of hardware, will see an expanded rollout this year as it hits additional retail outlets and rolls out to 14 additional countries. So far, the tablet has only been available at Microsoft's own stores and in select locations.

"Demand exceeded the limited assortment of touch devices available," Klein said.

The company is clearly committed to the idea that Surface offers the best use of Windows 8's touch capabilities; in the third quarter, Microsoft will focus on increasing production and distribution, Klein said.

The Surface Pro joins the rollout of Windows RT-powered hardware next month.

The more powerful version of the tablet, the Surface Pro, also rolls out this quarter, with a February 9 launch date.

Is Windows Phone 8 changing the mobile landscape? Not yet, though Microsoft has high hopes for its new mobile OS, which also launched in the second quarter. Klein said sales of Windows phones were four times higher than they were in the same quarter last year. Again, though, Microsoft shied away from providing specific numbers.

Microsoft's Entertainment and Devices Division, which includes the Xbox and Windows Phone 8, saw revenue slip by 11 percent to $3.8 billion. Adjusted for video game deferral revenue, or when players have rights to buy content in the future, that revenue drop was only 2 percent.

Is enterprise where it's at? It certainly seems so. Microsoft reported a 9 percent revenue increase in the Server & Tools division, helped by the launch of SQL Server 2012 and Windows Server 2012. Klein said double-digit increases in multi-year software licensing agreements with businesses contributed to the record revenues last quarter.

But many of those businesses are upgrading from Windows XP to Windows 7, not to Windows 8. So the question remains: Are people buying Microsoft's "reimagining" of the future, as Klein and company CEO Steve Ballmer have often called it?

Originally published on www.pcworld.com. Click here to read the original story.

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