An often irreverent look at this week's other Microsoft earnings announcement news ...

Microsoft Quarterly Earnings: Profits Down a Bit, Revenues Up a Bit

Microsoft delivered what I describe as solid financial results for Q4 2012, so this edition of Short Takes includes a number of follow-ups to that story, including information gleaned from the firm’s more detailed supplementary disclosures and the post-announcement conference call.

A Few Microsoft Numbers and Statistics

In its results-related disclosures, Microsoft released a few interesting numbers and statistics. These include:

Windows Phone sales: “four times” greater than during the year-ago quarter. What’s four times nothing? Next to nothing?

Xbox 360 console sales: 5.9 million in Q4, down 28 percent year-over-year.

Halo 4: Now the “best-selling” Halo game of all time. And it’s getting crushed by Call of Duty: Black Ops 2 on the Xbox 360. In fact, it’s not even close.

Xbox Live subscribers: Over 40 million now, which is roughly half of all Xbox 360s ever sold (but almost certainly a much higher percentage of those consoles still in use).

Windows 7 in the enterprise: Over 60 percent of all enterprise desktops now run Windows 7.

Windows 8 license sales: Microsoft said that it has sold “over 60 million copies” of Windows 8, which is another way of not updating sales numbers, since the firm revealed the 60 million figure earlier this month. So no update there.

Down in Q4: Office, Xbox

Two of the most notable revenue drop-offs in Microsoft’s Q4 were the Business division, which makes Office and absolutely nothing else of value, and Entertainment and Devices, which makes the Xbox and absolutely nothing else of value. And, go figure, the reason for the drop-off in each case was that the main products each division sells will be refreshed in the coming months. Microsoft will formally launch Office 2013—which includes new Office productivity suites, Office 365 online services, and new Office servers—by the end of this month. And Microsoft will announce its plans for multiple next-generation Xbox devices in early Q2 2013 (no, kiddies, not at E3) and will launch those products by the end of 2013. So don’t cry for Office or Xbox. They’re both racing out of the gates this year.

Windows 8: Hot or Not?

There’s been a lot of back and forth over whether Windows 8 is successful, and of course the story on this OS will be a long-term play, not a quickie one-quarter telling. That said, we know that Microsoft and its partners were disappointed with the launch, that fewer copies of Windows 8 and Windows 8-based PCs were sold in Q4 than the company expected, and that PC sales fell, both year-over-year and compared with the Windows 7 launch, in Q4 2012. But adjusting for deferred pre-orders, Windows division revenues rose 11 percent in Q4 2012. So what’s the deal? I’ll put it like this: When you launch a major new product and revenues rise only 11 percent, something is wrong. You would experience a giant spike in sales if customers were actually excited about your product and eagerly buying it up. So, yes, dear God, yes, I get it. Long-term play. But for now, Windows 8 has neither helped nor hurt the PC market. Let’s hope it doesn’t get any worse than that.

Windows 8: One Bright Spot

One fact that came out of the post-earnings conference call was that “non-OEM” Windows revenues—that is, Upgrade software sales and Surface RT sales—were up 40 percent when compared with the year-ago quarter. Now, that figure does more accurately reflect a launch quarter and is in line with what I would expect. This suggests that Microsoft’s contention that the soft Windows 8 launch was PC makers’ fault—because they didn’t deliver the multi-touch products they promised quickly enough—could in fact be correct. So it's possible that things will look better in the quarters ahead. Confused yet?

Windows Back on Top … For Now

I mentioned this in my news story about Microsoft’s earnings, but it’s worth repeating: After several quarters of being beaten down by Office, Windows was once again Microsoft’s biggest business in Q4 2012, with higher revenues than the Business division (which makes Office). I think that is temporary, and that the launch of Office 2013 will bring Business back where it belongs, especially when you consider that Windows (with $5.88 billion in revenues, a figure that included deferred sales) barely beat out Business/Office (with $5.69 billion, in the quarter before a major product launch). Still. Worth noting.

Another $1.1 Billion in Windows Revenues Will Be Added on Top of This Quarter’s Revenues

Speaking of deferred revenues—and we are, sort of—Microsoft also revealed that when its Windows Upgrade Offer expires at the end of February (this is the program where Windows 7 PC buyers can upgrade to Windows 8 for just $15), Microsoft will add another $1.1 billion in deferred revenues to its books. So that money will be added to the Q1 2012 results, and when you consider that the Windows division usually brings in about $4-5 billion in revenues a quarter, that’s a tidy little bump.

How Windows 8 Can Be Successful in 2013

Beyond simply bringing better Windows devices to market in 2013, Microsoft did offer up some interesting feedback it has received from business customers about what it could do to make Windows 8 more successful in 2013. “[Enterprises] like the ability to get thin, lightweight devices with the kind of security and manageability they're used to,” Microsoft CFO Peter Klein said. “There's early interest in new applications being developed with the Windows 8 user interface. You'll see those two things are early in driving business interest in Windows 8.” That said, I expect Windows 8 to be a niche, or vertical, product in the enterprise, with tablets going out first to executives and business travelers, while office workers stick with legacy Windows 7 desktops. But looking forward a bit, there’s another milestone on the horizon that could benefit Windows 8: Support for Windows XP expires in April 2014. And while many businesses will of course migrate to Windows 7, many will go to Windows 8 too, I bet.

Server & Tools Quietly Kicking Butt as Usual

One big bright spot for Microsoft, though it doesn’t get reported enough, is its Server & Tools business, which—like the product it makes—simply keep trudging along, workman-like, and delivering solid numbers. The business posted $5.19 billion in revenues and is, as always, Microsoft’s third largest money-maker. The firm reports that over 80 percent of Server & Tools’ revenues come from OEM sales (hardware bundles), volume license sales, and retail sales (including sales to individuals). And it’s worth pointing out that for all the angst around Windows 8, you never hear any major concerns about its server-side brother, Windows Server 2012. Well, aside from the epically pointless Start screen that really needs to be de-tuned in R2.

No Surface Numbers

Microsoft refused to provide sales numbers for its Surface with Windows RT tablet, which launched in October but was sold only by Microsoft Store online and at retail until mid-December. In that conference call I keep alluding to, Klein referred to the “limited distribution” of the initial Surface and how Microsoft was “excited about expanding that.” He noted that Microsoft would “expand the product line-up,” which some have erroneously taken to mean more Surface products beyond what we already know. But he was just referring to Surface Pro, which will launch in early February. (That said, yes, there will be more Surface models this year.) “Our goal is to continue to build that business,” he said. “We're going to expand geographically, we're going to expand the product line-up and retail distribution and capacity.”

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