Windows Sales Surge, Other Microsoft Units Struggle

TechFlash reports: A revival in consumer spending helped boost Microsoft's results for the December quarter, especially in the company's Windows division, leading to record revenues for the company overall and quarterly profit well above Wall Street's expectations. But beneath the surface, some other Microsoft divisions struggled to keep up -- particularly those that traditionally rely on technology purchases by businesses.

"While consumer demand remained healthy, we have not seen the return of enterprise spending growth," said Peter Klein, speaking on his first quarterly earnings call since taking over as chief financial officer.

Windows and Windows Live: Microsoft benefited here from a rebound in consumer PC sales, with the company estimating in its Form 10Q report that overall shipments of PCs increased between 15 percent and 17 percent for the quarter. At the same time, Windows 7 by itself appeared to have an impact, with the company's revenue from copies of the operating system installed on new computers increasing 21 percent for the quarter after adjusting for the impact of revenue that was deferred to the quarter because of Windows 7 upgrade deals.

"Not only did we participate in the PC growth that we had this quarter, but we exceeded it by basically every dimension," said Bill Koefoed, Microsoft's general manager of investor relations, in an interview.

But that is expected to be a limited effect, based on the buzz around the Windows 7 launch. Looking ahead, Klein said on the conference call that he expects Windows sales to be more in line with the rate of PC sales. Businesses should also start to refresh their hardware this year, Klein said, but that will happen gradually.

Server & Tools: Here's where that weak business spending starts to rear its ugly head. Revenue was up a mere 2 percent in this division, which once upon a time was known for consistently turning in double-digit revenue growth. The company said the market for computer servers remained weak, down slightly for the quarter compared to the same period the previous year.

"Product revenue increased $103 million or 3%, primarily driven by growth in Windows Server, Enterprise CAL Suites and System Center revenue," the company said it its 10Q filing. "The growth in product revenue reflects continued adoption of Windows platform applications. Services revenue declined $14 million or 2%, primarily due to decreased revenue from consulting services."

Online Services Divison: How much more patience will investors have with this part of Microsoft's business? Despite signs of recovery from rivals Yahoo and Google, the Microsoft Online Services Division continued to struggle, posting an operating loss of $466 million for the quarter -- even deeper than the $320 million loss posted by the division in the same quarter last year.

This came despite the gains in U.S. market share for its Bing search engine. Ads next to Bing search results are a key part of the company's business in this division. However, online display ads account for a bigger chunk, and that part of the business was down.

"Online advertising revenue decreased $11 million or 2%, to $516 million, reflecting a decrease in display advertising and advertiser and publisher tools revenue, offset in part by an increase in search revenue," the company said.

Microsoft Business Division: More signs of weak business spending here. This division, which includes the Microsoft Office programs and related products, posted a decline of 3 percent in revenue for the quarter, to $4.7 billion. Adding to the difficulty is the fact that the next version of Microsoft Office is slated for release in June of this year, and people normally hold off on buying the current version when they know a new one is one the way.

"Business revenue decreased $231 million or 6%, primarily reflecting a decline in licensing the 2007 Microsoft Office system to transactional business customers, offset in part by a 1% increase in Microsoft Dynamics revenue," the company said. "Consumer revenue increased $95 million or 12%, primarily as a result of growth in the PC market"

Entertainment & Devices: This Microsoft division, which includes the Xbox 360 and video game businesses, suffered from a "tough comparable," as they say, because the same quarter the previous year included the release of the popular "Gears of War 2" and "Fable 2," boosting results back then. But the economy also tool a toll, with the company saying it shipped 5.2 million Xbox 360 consoles for the quarter, down from 6.0 million the same quarter last year.

Other parts of the division also suffered, thanks in part to the beleaguered Windows Mobile unit, and to everyone's favorite Microsoft music player. "Non-gaming revenue decreased $59 million or 8%, primarily reflecting decreased sales of Zune digital music and entertainment devices and Windows Mobile device platforms," the company said.