Overall revenue was up 5% to $20.9bn with operating income down to $7.99bn (vs $8.17bn) and net income flat at $6.62bn (vs $6.63bn). The headline result was a 6% drop in Windows revenue to $4.7bn and an 11% drop in Windows division operating income to $2.85bn.
Windows sales track PC sales so the drop was expected (see here). The decline in PC sales, which was exacerbated by floods in Thailand causing hard disk shortages, hit Microsoft during the quarter and the impact is expected to last into Q3. But there are other trends impacting Windows sales and prospects. For example, PC sales to emerging markets are outpacing developed markets and that hits sales and profitability.
Meanwhile sales of netbooks continue to decline (from 8% a year ago to 2%) as mobile and tablet sales rise which is a baseline concern for Microsoft. It is pinning it hopes on an uplift from new Windows phones and the Windows 8 launch later this year but it has a nervous time until then over whether it has missed the opportunity and whether it will be able to regain market share.
However the Server and Tools and Business divisions (along with Entertainment and Devices, up 15%), made up for the Windows lag. Server and Tools delivered 11% revenue growth to $4.8bn. This was aided by sales of Windows Server Premium and System Centre but also driven by multi year license revenue that is now in the mid teens, and Enterprises Services.
The Business division was up 3%, thanks to ongoing Office 2012 sales but also increased activity around Exchange, SharePoint, Lync and Dynamics CRM (up 30%) and ERP (double digit growth). Office 365 is said to doing well with 100K customers, but Microsoft still declines to talk about revenues.
However, Business division consumer revenues slumped by 17% ( or 2% down if $224m of revenue from its Office 2010 Technology Guarantee Programme is excluded), while business sales rose 9%. As we have said previously (see here) it is important for Microsoft to grow in the consumer market, particularly given the BYOT trend, so consumer and business revenue is a significant indicator of future prospects. The general trend within Microsoft is towards lower consumer revenues
Online services revenue was up 10%, largely due to growth in the US, plus search driving advertising revenue up.
Overall Microsoft had a creditable quarter despite the drop in Windows revenue. What’s more, Microsoft’s performance was reassuring in the wake of Oracle’s poor results (see here), and good results from SAP (see here). Oracle’s problems could be specific to the company, and not an indicator of widespread drop in the software sector.