Microsoft posts decline in revenue and profits on the eve of Windows 8 launch

Microsoft has announced its results for the first quarter of its financial year. The quote from Chief Financial Officer Peter Klein sums it up pretty well:

While enterprise revenue continued to grow and we managed our expenses, the slowdown in PC demand ahead of the Windows 8 launch resulted in a decline in operating income

Except that is for one thing. Klein implies that the PC slowdown is something to be expected ahead of the launch of a new edition of Windows, but I suggest there is more to it than that. First though, here are the figures, in the summary form that I have used before:

Quarter ending September 30th 2012 vs quarter ending September 30th 2011, $millions

Segment Revenue Change Profit Change
Client (Windows + Live) 3244 -1630 1646 -1624
Server and Tools 4552 +336 1748 +183
Online 697 +56 -364 150
Business (Office) 5502 -133 3646 -71
Entertainment and devices 1946 -15 19 -321

What is notable here is a significant reduction in revenue from the Windows client, while the enterprise-focused server and tools continue to grow. The Office products are bumping along fine, despite a small reduction in revenue, and despite the fact that we are on the eve of a new edition of Office as well as Windows.

Note that I am not a financial analyst, so take the following observations in that light.

I suggest that falling revenue from the Windows client is not just because Windows 8 is on the way, but because of a shift in the market towards mobile and tablets – Apple iPad and Google Android devices. See this post for an example of that in the consumer market.

Will Windows 8 deliver the hoped-for boost in PC and Windows sales? I am sceptical, especially in the short term (in other words, the next quarter). I discussed some of the issues here. Microsoft is making radical changes both to Windows and to its business model. It is doing the right thing, bringing Windows into the tablet era, and venturing into Windows device manufacture in order to pull quality of hardware design into its own hands rather than trusting entirely to OEM partners.

That transition may or may not work long-term, but in the short term it is likely to be costly. In Windows 8 Microsoft has concentrated on establishing a new ecosystem around the new tablet-friendly Windows Runtime platform. The consequence is that it does not deliver much benefit to users of desktop applications – in other words, all Windows applications other than those in the new Windows app store. Further, moving to Windows 8 is difficult at first for those familiar with Windows, so much so that many users react against it.

This means that Windows 8 will not deliver the upgrade rush that Windows 7 enjoyed, following on from the unpopular Vista. Rather, its success rests on the new elements in Windows: tablet use and Windows 8 apps.

Right now though, there is very little in the Windows Store that is good enough to drive sales. Developers are waiting to see if the platform succeeds before diving in.

The Windows 8 platform does have plenty of potential; and Microsoft is putting a huge promotional push behind it. Against that, there are powerful forces that will tend to suppress demand. It is going to be a battle, and one for which the outcome is hard to predict.

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Related posts:

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  2. Microsoft financials: record revenue, signs of Windows 8 concern
  3. Microsoft announces launch dates for Windows 8: software will be done early August
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  5. Microsoft financials: record revenue, consumer sales declining in drift towards Enterprise

2 comments to Microsoft posts decline in revenue and profits on the eve of Windows 8 launch

  • Tom

    You have to be careful when looking at GAAP numbers for Microsoft.

    Because of the revenue deferral, Microsoft *always* posts a decline before a new OS launches, and it *always* posts an increase when a new OS launches. That was true for Vista, and it will also be true for Windows 8.

    And because the accounting treatment of revenue deferral varies depending on the specifics of the upgrade offer, you can’t compare GAAP-to-GAAP either. The only way to really figure out what’s gong on is to take out the deferral, and compare non-GAAP to non-GAAP.

    So let’s look at the Windows division revenue numbers from the quarters preceding General Availability of new versions.

    Q1 F2013 (ending September 30, 2012): GAAP down 33%, non-GAAP down 9%.

    Q4 F2009 (ending June 30, 2009): GAAP down 29%, non-GAAP down 22%.

    Q2 F2007 (ending December 31, 2006): GAAP down 25%, non-GAAP up 8%.

    This shows what actually sold, not what the accounting treatment mandates for the revenue deferral. In the light of these figures, the Windows division is currently doing worse than XP-to-Vista, but better than Vista-to-7.

    Thus, it is plausible indeed “that the PC slowdown is something to be expected ahead of the launch of a new edition of Windows.”

    Might tablets also have also had something to do with this? Certainly. How much? We can only guess.

    Plus, there are the macroeconomic factors. XP-to-Vista was at the top of the real estate bubble. Vista-to-7 was crawling back from the bottom of the financial markets. 7-to-8 is also taking place at a time of slow economic growth.

  • tim

    Thanks Tom, interesting comparison. I accept that the real decline in Windows client is less than the GAAP figures suggest. I still think tablets are having a significant influence, but as you say, we are guessing to some extent; and as I also noted, I find the prospects for Windows 8 hard to predict.