Microsoft Profits Are Up, But Its Outlook For Windows May Be Down

Microsoft had some news today: It confirmed plans for smaller "touch devices" in coming months — i.e., the rumored Smaller Surface — and preemptively blamed a presumably darkening outlook for Windows on the "declining traditional PC market." It also reported growing revenues and profits for the quarter that ended in April.

Just as important, though, might be what Microsoft didn't say. It was mum about the performance of its flagship Windows 8 operating system, and wouldn't say how well its Surface tablet has been selling. Hmm.

By The Numbers

Microsoft reported net income of $6.06 billion (72 cents per share) on revenue of $20.49 billion for the quarter, an 18 percent increase in profits and an 18 percent increase in revenue versus a year ago. After adjusting for $1.66 billion in Windows Upgrade, Office and Xbox upgrades, and a $731 million fine assessed by the EU, Microsoft reported diluted earnings per share of 65 cents.

Analysts polled by Yahoo had expected Microsoft to report earnings of 68 cents per share, up 13% from a year ago, and grow revenue by 18 percent to $20.56 billion. Microsoft also said that Peter Klein, the company's chief financial officer, would leave at the end of the fiscal year, or June. Microsoft will name a replacement in the next few weeks.

When all is said and done, Microsoft's bottom line is healthy — every product division reported increased profits except for the company's online business, where losses shrank. But as the company itself admitted, the outlook for Microsoft's Windows division and Windows 8 remains, at best, uncertain.

How Many Windows 8 Licenses? Redmond Sayeth Not

Microsoft reported $5.7 billion in revenue and $3.5 billion in profits for the Windows division, but once you set aside deferred revenue due to Windows upgrade offers, revenue was basically flat compared to a year ago. And then there was Microsoft's continued silence on how many Windows 8 licenses it sold.

Both IDC and Gartner blamed the slow uptake of Windows 8 for a stunning drop in first-quarter PC sales: 14% by IDC's metrics, and 11% according to Gartner. Most of the top PC manufacturers saw sharply lower sales for the first quarter, according to both firms, with Lenovo the big exception.

In January, Microsoft said it had sold more than 60 million Windows 8 licenses. That was up significantly over the number of pre-launch licenses it sold — 40 million in the first month, Microsoft said last year. And yet now the company has gone silent on the subject. This is not what you'd normally consider a good sign, particularly coupled with Redmond's oracular statement about the declining PC market.

On the other hand, Klein offered no shortage of happy talk about Windows on the analyst call. Check it out (MS Word doc).

Surface Gets Small, But Sales Remain Numberless

Outgoing CFO Peter Klein confirmed rumors of a smaller Surface tablet in a backhanded sort of way. During Microsoft's conference call with analysts, Klein declined to say how many Surface tablets the company had sold (again, not exactly heartening news). But, he said, the lineup will be refreshed with smaller "touch devices" in the coming months.

IHS iSuppli estimated that Microsoft sold, at most, one million Surface tablets during the fourth quarter. That's compared to a record 22.9 million Apple iPads, plus millions more Nexus 7s, Kindle Fires, and other 7-inch tablets.

Separately, Klein said that Microsoft was looking ahead toward Windows Blue, the next iteration of Windows 8 and, possibly, Windows Phone. He told analysts that Blue is designed to "further advance" Windows 8 and "in response to customer feedback." Rumors suggest that feedback may lead to the return of the Start button and an ability to boot directly to the Windows desktop, as opposed to the way Windows 8 forces all users into the tile-layout "Metro" interface.

Return To The Enterprise

Microsoft's Office division returned to growth in the quarter, with revenues up 8% to $6.3 billion. In January, Office delivered a nasty shock — a 10% revenue decline — apparently because the company's online service based version of the productivity suite, Office 365, hadn't performed as expected.

“Our enterprise business continues to thrive,” said Kevin Turner, chief operating officer at Microsoft, in a statement. “Enterprise customers are increasingly turning to Microsoft for their IT solutions and as a result, we continue to take share from our competitors in key areas including hybrid cloud, data platform, and virtualization.”

Microsoft's rock, its Server and Tools business, reported $1.98 billion in profits and $5.0 billion in revenues. Microsoft's Entertainment business, which includes the Xbox, returned to profitability, reporting $342 million in profits and $2.5 billion in revenue. Online services only lost $262 million (versus $480 million a year ago) and reported $832 million in revenues. 

The next few quarters will be important for Microsoft, as the company's large installed base of corporate customers still using Windows XP must either switch by April 8, 2014, or else risk losing support for both XP as well as Office 2003. Earlier this month, Microsoft offered small businesses a 15 percent discount for upgrading to Windows 8 Pro and Office 2013.