Microsoft Earnings Surprise: Windows Soars, While Office Struggles

Maybe Windows 8 isn't doing so badly after all.

Overall, Microsoft profits fell 4% during the fourth calendar quarter, although revenue climbed. Revenue and profits within Microsoft's Windows division jumped dramatically compared to a year ago, however.

In total, Microsoft reported $6.4 billion in net income, in line with what analysts expected. Revenue increased 2.73% to $21.5 billion.

Microsoft Beats Wall St. Estimates

Analysts had expected the firm’s revenue to grow about 3% from the $20.9 billion the company posted in the same period last year to around $21.5 billion, according to analysts polled by Yahoo Finance. They also anticipated a 4% drop in profits, from 78 cents per share to 75 cents per share. 

“Our big, bold ambition to reimagine Windows as well as launch Surface and Windows Phone 8 has sparked growing enthusiasm with our customers and unprecedented opportunity and creativity with our partners and developers,” said Steve Ballmer, chief executive officer at Microsoft, in a statement. “With new Windows devices, including Surface Pro, and the new Office on the horizon, we’ll continue to drive excitement for the Windows ecosystem and deliver our software through devices and services people love and businesses need.”

Microsoft's Windows division recorded the highest revenue of all of Microsoft's business units, and nearly the highest profits as well.

Microsoft said that in total, more than 60 million Windows 8 licenses had been sold, in keeping with what Tami Reller, Microsoft's Windows marketing chief, had said earlier this month. Revenue from the Windows and Windows Live Division jumped by 24% versus a year ago, and profits climbed 14%. For the September quarter, the Windows and Windows Live Division produced $1.64 billion in profits on  $3.2 billion in revenue.

 At launch, Microsoft claimed that 16 million Windows 8 pre-release licenses had been installed; by the end of November, 40 million Windows 8 licenses had been installed. In January, Windows marketing chief Tami Reller said 60 million Windows 8 licenses had been installed. 

Office 365 Subscriptions Didn't Pay Off

Microsoft made a bit bet on its Office 365 suite, pricing Office 365 at less than the standalone Office package and tempting its customers to switch to the subscription model. Surprisingly, that didn't pay off. Revenue fell 10% to $5.7 billion, while profits fell 15%. Traditionally, Microsoft's Business Division yields the most revenue among Microsoft's business unit; for the September quarter, the unit reported $3.6 billion in profits on top of $5.5 billion in revenue.

Microsoft's Server & Tools business reported $2.1 billion in profits on top of $5.19 billion in revenue. For the September quarter, Server & Tools produced $1.7 billion in profits on $4.5 billion in revenue. Microsoft's Online division lost less money than a year ago - $283 million, on higher revenue of $869 million. And Microsoft's Entertainment Division, which houses the Xbox, recorded a larger $596 million profit on revenue of $3.7 billion.

Microsoft had predicted a strong start to Windows 8. In October, Keith Lorizio, vice president of U.S. sales and marketing for Microsoft, predicted that 400 million users would be using Windows 8 by July 2013.

Windows 8 Sales Could Quiet Critics

For months, there have been signs that Microsoft's Windows 8 software didn't take off as quickly as, say, an Amazon Kindle or Apple iPad - signs that Microsoft's revenue figures seem to disprove. A top executive at Internet retailer NewEgg, for example, had characterized the Windows 8 launch as "slow going." Merle McIntosh, the senior vice president of product management of Newegg North America, said in November that he expected sales of Windows 8 to begin taking off during the second quarter of 2013. Julie Larson-Green, the head of Windows development, talked about how it could take weeks to transition to Windows 8. And Tami Reller, in charge of marketing strategy for Windows 8, began managing expectations for Windows 8 weeks ago by spinning it as a product that would require multiple selling seasons to get up to speed. 

  

Image source: Microsoft