Revenue at Microsoft’s Windows division was up 11 per cent in the fourth quarter of 2012, bucking the long-running trend where the company’s OS sales have mirrored Personal Computer sales.
But the unexpected results, which made Windows the company’s top revenue-producing group for the first time since 2009, did little to answer the question on analysts’ tongues: How did Windows 8 perform in its first sales test?
“I heard absolutely nothing on how Windows 8 is doing,” the Principal Analyst at Moor Insights & Strategy, Mr. Patrick Moorhead, said. “I have to believe it’s because it’s not an impressive number. If it was, there would be horns being blown at the top of the buildings in Redmond.”
That silence may speak volumes. By most accounts, Microsoft’s new Windows 8 operating system has not provided the sales “pop” to the PC industry that a new edition has typically delivered — a sign many have read as trouble for Windows 8 specifically and Microsoft overall. In the fourth quarter of 2009, for instance, when Microsoft released Windows 7, the company recorded $6.9bn in Windows revenue, a 28 per cent increase over the prior year.
This upgrade cycle, Windows’ revenue was $5.9bn, representing a 24 per centy increase over the same period in 2011, or an 11 per cent jump after adjustments for early sales of Windows 8 and a $15 upgrade offer to buyers of new computers.
But as both numbers were at odds with estimates of PC sales, which research firm IDC recently pegged as down 6.4 per cent for the quarter, analysts struggled to parse Windows 8’s execution.
“It was all kind of confusing,” acknowledged an analyst with IDC, Mr. Bob O’Donnell in an interview Friday, of the revenue upswing in the face of declining PC sales. Windows revenue typically syncs with PC shipments; as the latter rise and fall, so do sales of Windows licenses.
Microsoft executives did tell Wall Street analysts last week that the company had sold 60 million Windows 8 licenses, but that milestone had actually been announced weeks earlier. And as is its practice, Microsoft did not separate Windows 8 revenue from the division’s total, which also included sales of Windows 7 and the new Surface RT tablet.
In last Thursday’s earnings call, Microsoft CFO Peter Klein explained how the Windows division outperformed the PC market.
“The three biggest components of the 11 per cent total revenue growth were the retail upgrades, the sales of the Surface (RT tablet) and then multi-year licensing agreements within enterprises,” Klein said in the question-and-answer part of the earnings call.
Klein also admitted what he called “some tailwind” from sales of Windows licenses — presumably Windows 8 licenses to computer makers known as Original Equipment Manuafcatuer for “original equipment manufacturers” — that have been installed on new machines that remain unsold.
“There was some tailwind from inventory, which was … within the healthy range that we typically see,” Klein said. “But the three big impacts, all up, on the Windows revenue were the retail upgrades, sales of Surface and the enterprise annuity business.”
O’Donnell was skeptical, and believed that the “tailwind” Klein downplayed was really the driving factor in Windows’ revenue upswing.
“Our sense is that the [OEM] build [numbers] going into Windows 8 were relatively high, and that there is a lot of remaining inventory because sell-through was relatively modest,” O’Donnell said, echoing other analysts who argued that fourth-quarter PC sales were sluggish at best. “They sold more (licenses) than OEMs needed.”
Moorhead wasn’t buying it
“This isn’t just inventory sitting out there,” Moorhead countered. “That’s not what’s coming out of my discussions with OEMs or retailers. (Such large inventories) would be a monumental collapse if you think about it. You just can’t sit on that much revenue.”
Instead, said Moorhead, he put his money on Klein’s mention of increased sales of volume license agreements to enterprises, which Microsoft said had climbed by double digits.
“The big boost in revenue is coming from Windows 7, from very large deals that Microsoft does with enterprises,” said Moorhead. “That’s the only way you can explain (the 11 per cent increase in revenue).”
He discounted Surface RT sales for the revenue boost, pointing to the limited distribution for the tablets during much of the quarter, and a lackluster response by customers.
Microsoft did not disclose sales for the Surface RT last week.
Pumping up volume license sales would be relatively easy for Microsoft, Moorhead noted. Because those deals involve intangible goods, all Microsoft would have to do, he argued, was offer customers better-than-usual terms to get them to sign on the dotted line.
Neither analyst commented on another of Klein’s explanations for the Windows revenue increase, Windows 8 upgrades. But those upgrades may have played a bigger part than most realise.