Microsoft had a pretty good Q3 in terms of the numbers but the real story of how it – and particularly Windows - is faring lies in the detail.
Overall revenue was up 18% yoy to $20.49bn with net income up 18.5% to $6.06bn, and operating income of $7.61bn. So far so good and the market rewarded Microsoft with a c2% rise in the share price in after hours trading.
As for Windows, the division delivered a 23% revenue lift, taking it to $5.7bn, but after adjustments for the Windows Upgrade offer, revenue was flat. Currently Windows sales have two main drivers – PC sales and Windows 8 adoption. PC sales are slumping of course (see here) and the market is mourning the loss of the Start button and failing to take to Windows 8 with any enthusiasm. With those two negative forces, the division did well to maintain flat revenue so it looks like Surface sales played a positive part.
Microsoft cannot afford for the Windows division to run flat so there is plenty of work behind the scenes to pump it up. CEO Steve Ballmer’s comment that “While there is still work to do, we are optimistic that the bets we’ve made on Windows devices position us well for the long-term,” is an acknowledgement that change is in order. Similarly, CFO Peter Klein said that the company is working with hardware makers to take Windows 8 across different form factors and was prioritising smaller lower cost devices in coming months. And there is still the hope that Microsoft will do something to appeal to Start button lovers and address concerns about poor usability on non-touch devices when Blue, the next iteration of Windows 8 arrives, which is expected to be later this year (see here).
Microsoft is a diverse business and that diversity is helping it maintain growth but in essence the company is still defined by Windows. What happens if that changes is the big question of course, which is why multi platform Windows 8 is so important. It is still relatively early days but it is becoming evident that the company needs to redraw some of its plans.
Elsewhere, Microsoft Business Solutions, saw a respectable 8% revenue rise to $6.32bn, but adjusted for Office updates and presales the increase was a more modest 5%. There were no complications within the Server and Tools division with revenue up 11% to $5.04bn as enterprises continue to buy into SQL Server and System Centre. Online services revenue was up 18% to $832m, due largely a 22% lift in online advertising revenue from an increase in revenue per search. Entertainment is still moving ahead too.
The Q3 results were also accompanied by another announcement, that CFO Peter Klein is to leave at the end of the fiscal year in June, adding to the toll of senior people leaving the company. He has been with Microsoft for 11 years and CFO for 4. Change is often good but the loss of experienced people around Ballmer is a concern. Ballmer is a constant but with the level of attrition you have to wonder whether that could or should change (see here for additional thoughts on this theme).