Microsoft revenue up, aided by Windows unit sales, though profit declines

The results are the first to include Windows 8

Though Microsoft's second-fiscal-quarter profit declined, company revenue increased, helped by its Windows division, where sales shot up more than 20 percent year on year.

Microsoft reported a drop in profit for the second quarter of its fiscal year, though revenue increased, thanks partly to a 24 percent jump in sales from its Windows division.

Microsoft's revenue increased 2.7 percent to US$21.46 billion in the quarter, which ended Dec. 31.

Net income shrunk to $6.38 billion, or $0.76 per share, from $6.62 billion, or $0.78 per share, in Microsoft's second fiscal quarter of 2011, the company said on Thursday.

CEO Steve Ballmer said in a statement that Microsoft's "big, bold ambition to reimagine Windows," along with other initiatives like its Surface tablet and the new Windows Phone 8, are paying off.

The Windows division generated revenue of $5.88 billion, up 24 percent year on year. However, on a pro forma basis revenue was up only 11 percent, when factoring in a net deferral of revenue for the Windows Upgrade Offer and the recognition of previously deferred revenue from Windows 8 pre-sales.

The Server & Tools business, which includes products like SQL Server and System Center, posted revenue growth of 9 percent to $5.19 billion. System Center revenue was up 18 percent, while SQL Server revenue climbed 16 percent.

The Business Division, which includes the Office suite, reported $5.69 billion in revenue, down 10 percent. Adjusted for the impact of the Office Upgrade Offer and pre-sales, pro-forma revenue rose 3 percent. Revenue from server software including Lync, SharePoint and Exchange hit "double-digit percentage growth." Microsoft is expected to ship a new version of the Office suite this quarter.

The Entertainment and Devices Division, which includes the Xbox products, saw revenue decline 11 percent to $3.77 billion. Microsoft sold 5.9 million Xbox consoles in the quarter, down 28 percent, while its Skype business, also part of this division, saw a 59 percent increase in call minutes.

The Online Services Division, which includes online advertising generated by Web properties like the Bing search engine, increased its revenue 11 percent to $869 million.

Overall, Microsoft said that its pro-forma revenue was $22 billion, when adjusted in part to reflect revenue deferrals for several Windows, Office and video game offers, as well as pre-sales.

In a conference call to discuss the results, CFO Peter Klein called the numbers "solid," and said Microsoft is building momentum behind Windows 8 and Windows Phone 8, and behind upcoming releases like Office 2013 and its Surface Pro tablet.

Microsoft also experienced "strong growth" in multi-year licensing revenue, he said, exceeding 15 percent year on year, a sign that enterprise customers are making long-term bets on the company.

Windows 8 sports a radically redesigned user interface based on tile icons that is optimized for touchscreens found primarily in tablets but also in newer "hybrid" laptops and some desktop PCs, like all-in-one systems.

The new OS started shipping in October, and Microsoft has said it is satisfied with the product's sales, a message that is at odds with skeptical views from market researchers like NPD Group and IDC, as well as financial analysts from Morgan Stanley.

In November and again in January, Microsoft said that Windows 8 shipments were "roughly" in line with Windows 7 shipments at the same stage of the sales cycle three years prior.

However, NPD Group declared in late November that Windows 8 had failed to give the consumer Windows PC and tablet market enough of a boost, and that in the first four weeks after its launch Windows device sales fell 21 percent year on year.

Later in early January, NPD Group said that Windows 8 "did little to boost holiday sales or improve the year-long Windows notebook sales decline."

About a week later, Morgan Stanley financial analysts downgraded the firm's recommendation on Microsoft's stock from Overweight -- the equivalent of "buy" -- to Equal Weight, the equivalent of "hold," citing concerns over Windows 8 sales and over the PC market dynamics.

Meanwhile, IDC reported that worldwide PC shipments fell 6.4 percent to 89.8 million units in the fourth quarter of 2012, year on year, a steeper decline than the 4.4 percent IDC had anticipated. A big part of the problem was that Windows 8 failed to jump-start sales, IDC said.

Even while expressing satisfaction with Windows 8 sales, Tami Reller, CFO and chief marketing officer of the Windows Division, acknowledged in January that OEM partners hadn't made enough Windows 8 touch devices to meet the high demand for that type of computer.

"Frankly, the supply was too short," she said then at an event held at the CES show in Las Vegas where she answered questions from a JP Morgan analyst.

"There was some misalignment between where products were distributed and where the demand was," she added.

Some tablets running Windows RT -- the Windows 8 version for ARM chips -- didn't get the type of distribution that would have been "ideal," she said.

Microsoft's CFO reiterated these points Thursday, saying Microsoft is working with its chip and OEM partners to fine-tune the availability of Windows 8 devices to make sure there is the right mix of price points and configurations.

A similar effort is under way with developers to increase the variety and volume of Windows 8 applications. And Microsoft is taking steps to expand the distribution of its Surface tablets.

Its early days," Klein said. "An ambitious endeavor like this takes time.

Microsoft has sold more than 60 million Windows 8 licenses, he said, repeating what Reller had said earlier this month. At the same time, Windows 7 deployments continue, and it is now on more than 60 percent of enterprise desktops worldwide, according to Klein.

Microsoft is counting on Windows 8 to help improve the operating system's minuscule share in the white-hot tablet OS market, where it lags significantly behind iOS and Android. Meanwhile, the PC market, where Windows has historically been the dominant OS, is shrinking.

Last year, Gartner forecast that worldwide media tablet sales to end users would total 119 million units in 2012, up 98 percent compared with 2011, and that Apple's iOS would continue its dominance with a projected share of over 61 percent. Windows tablet shipments were expected to be only 4.8 million in 2012.

Microsoft has been offering Windows 8 Pro upgrades at discounted prices as low as $14.99, but prices will shoot up after Jan. 31 to $199.99.

One special offer lets people upgrade an existing Windows XP, Windows Vista or Windows 7 PC and lets them acquire Windows 8 Pro for $39.99 via download or $69.99 from a retail store DVD. The other offer, priced at $14.99, is for consumers upgrading a new Windows 7 PC bought between June 2 of last year and Jan. 31 -- they have until Feb. 28 to register for the special upgrade price.

After Jan. 31, people will also be able to upgrade for the first time to the regular version of Windows 8 for $119.99.

Windows 8 Pro is more advanced than Windows 8 in areas like security, networking, virtualization and remote desktop access.

Juan Carlos Perez covers enterprise communication/collaboration suites, operating systems, browsers and general technology breaking news for The IDG News Service. Follow Juan on Twitter at @JuanCPerezIDG.

Copyright © 2013 IDG Communications, Inc.

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