Windows Declines But Microsoft Has Solid Quarter

Microsoft offered strong quarterly results but one of its revenue pillars – the long-running Windows franchise – experienced a slight decline.

The company reported revenue of $17.37 billion (£10.65bn) for its fiscal fourth quarter ended June 2011, an eight percent increase year on year. Quarterly operating income, net income and diluted earnings per share were $6.17 billion (£3.78 bn), $5.87 billion (£3.6bn) and $0.69 (£0.42) per share, all of which represented increases. Overall, the company reported revenue of $69.94 billion (£42.88bn) for the fiscal year.

Office And Server Revenue Growth

As expected by many analysts heading into the reporting period, Microsoft’s revenue came on the back of its flagship software products. Microsoft Business Division revenue grew 16 percent during the quarter, driven by sales of Office 2010, while Server and Tools revenue grew 12 percent, driven by products such as Windows Server.

Both the Online Services Division and the Entertainment & Devices Division reported gains. In the latter case, the hands-free Xbox Kinect game controller has proven a bestseller and something of a life-extender for the aging console. Microsoft also emphasised its relationships with Facebook and Yahoo, both of which are being leveraged to increase market share for the company’s Bing search engine.

Windows 7 continued to perform strongly, selling some 400 million licences, although Windows and Windows Live Division revenue declined 1 percent in the fourth quarter. During the earnings call, Microsoft executives attributed this dip to softening PC sales.

A handful of times this quarter, the company showed off early work on the next version of Windows, which it has internally code-named “Windows 8”. In place of the traditional desktop and taskbar, Windows 8 relies on colour tiles designed to be equally tablet and PC-friendly.

Cloud Strategy Drive

Microsoft also used this quarter to further drive its “all-in” cloud strategy. “We’re moving forward to the cloud, public and private,” CEO Steve Ballmer told those assembled to hear his keynote speech at the Worldwide Partner Conference on July 11. “We’re all in, and we want partners who are all in with us.”

Near the end of June, Microsoft launched Office 365, which links Microsoft Office, SharePoint Online, Exchange Online and Lync Online into a common platform that costs between $2 and $27 (£1 and £17) per month, depending on options. In addition to rebranding the company’s BPOS (Business Productivity Online Suite) platform, Office 365 represents Microsoft’s attempt to blunt Google’s momentum in the cloud productivity space.

Office 365 “gives us new opportunities to address the workforce that doesn’t regularly use a PC in the workplace”, Microsoft chief financial officer Peter Klein told analysts and reporters listening to the earnings call, while suggesting that the subscription-based service would boost “revenue and profit per seat while increasing customer commitment”.

Microsoft is also using every opportunity – including this latest earnings call – to highlight its upcoming Windows Phone “Mango” update, which will give the company’s smartphone platform an added 500 tweaks and features. Although research firms such as comScore estimate Microsoft’s smartphone market share as declining, Redmond clearly hopes that continual improvements to the Windows Phone franchise – along with its recent partnership with Nokia – will help reverse that trend.

Microsoft is also pushing back against Google Android, one of its chief competitors in the smartphone space, by claiming the operating system violates its patents. Over the past several weeks, Redmond has entered into royalty agreements with a number of Android manufacturers, a strategy it plans on continuing into the future. “We have a firm culture and belief in innovation,” Klein told an analyst during the question-and-answer session following the earnings call. “We’ve done that consistently in an industry-wide licensing programme related to Android.”

Even as Windows sales flatten and Microsoft struggles to find its footing in the smartphone space, the company continues to push the cloud in a major way – and for good financial reason. “As we continue to have conversations about migrations to the cloud,” Klein added at another point, “you’ll start to see that in our multiyear licensing revenue”.