April 19, 2013, 10:37 AM — Even though PC shipments were down 14% last quarter, Microsoft's Windows division yesterday posted revenue about the same as the last year, making up for slumping sales to OEMs with impressive growth in long-term licensing agreements sold to enterprises.
But for the second quarter in a row, Microsoft said nothing about Windows 8 sales, leaving analysts to question whether the company can sustain sales of its operating system without a rapid turnaround in tablets.
The lack of any number -- the last time Microsoft touted Windows 8 licenses sold was in early January, when it said it had dealt out 60 million -- wasn't surprising to some.
"They'll wait until the end of the fiscal year to show a more impressive number," said Wes Miller, an analyst with Directions on Microsoft, in a Thursday interview. "And they'll do that again in October, on the anniversary of Windows 8's launch."
When Microsoft has highlighted Windows 8 sales before, it said they were roughly in line with Windows 7 at the same point in its sales cycle. The lack of any recent trumpeting of sales suggests that Windows 8 sales now lag behind those of Windows 7 two quarters after its release.
That supposition is matched by recent data, which shows that Windows 8's usage share badly lags behind Windows 7's at the same point after its debut in 2009.
During the first quarter, the Windows group recorded revenue of $5.7 billion, or 23% above the same three-month span in 2012. But because $1.1 billion of that was simply shuffled from last year -- deferred from the sales of Windows 7 under a free Windows 8 upgrade program -- the adjusted revenue of $4.6 billion was the same as last year.
Windows accounted for 28% of the company's total revenue of $20.5 billion for the quarter, slightly above 2012's fourth-quarter contribution. Microsoft's Business division, the part of the firm responsible for Office, was the largest supplier, however, with a 31% share of all revenue.
Microsoft acknowledged that Windows sales had been hit by the slump in PC sales, which IDC last week estimated had contracted by 14% from the year prior. "OEM revenue performance was in line with the underlying x86 PC market, which continues to be challenged as the PC market evolves beyond the traditional PC to touch and mobile devices," Chris Suh, who heads Microsoft's investor relations, said in a conference call with Wall Street analysts yesterday.
That Windows managed to remain flat in the face of the drastic fall-off in PC sales -- IDC said the quarter's decline was the largest in nearly 20 years -- was impressive.
Microsoft made up for the slack in Windows sales to OEMs (original equipment manufacturers) such as Hewlett-Packard, Lenovo and Dell by boosting sales to enterprises.
Windows's volume license agreement revenue was up double digits, Suh said, and on track to bring in $4 billion in the fiscal year, which ends June 30. Three-quarters of all enterprise agreements -- the most comprehensive and expensive plans sold to businesses -- included Windows, he added.
"If that's true it means companies either have confidence in Windows over the next three years, or Microsoft is heavily discounting those agreements," said Rob Helm, a colleague of Miller at Directions on Microsoft.
Patrick Moorhead, principal analyst at Moor Insights & Strategy, thought the latter was responsible for the solid year-over-year growth in volume licensing sales to enterprises.
Pumping up volume license sales is relatively easy for any software maker, including Microsoft, Moorhead noted. Because software is an intangible good, all Microsoft had to do to lift revenue was offer major enterprise customers discounts to get them to sign.
"Microsoft can massage the numbers as they relate to licenses for enterprises and consumers," said Moorhead. "And that's exactly what they're doing here. The reality of the situation is that you really can't measure Windows performance from license sales. The fact is that new PCs weren't sold, so from a strategic point of view, their numbers don't hold a lot of value."
The Redmond, Wash. developer has other weapons in its arsenal, too. Along with the carrot of discounts, the company can brandish the stick of software audits -- where it investigates a customer to make sure it's licensed the proper number of devices or users -- to prod enterprises into signing new agreements.
Some analysts, including Helm, also believed that Windows revenue benefited from enterprises pushing their migrations from Windows XP to Windows 7 as the former faces an April 2014 retirement deadline.
Microsoft makes more money from selling in-place upgrade licenses to businesses than it does to OEMs, twice as much by some estimates, another possible reason the division was able to generate sales.
"Microsoft is benefiting from Windows 7 migrations to a certain extent," said Helm. "More companies are upgrading PCs that are three or four years old, that when they were bought, were downgraded to XP. And Microsoft may be giving incentives on those upgrades."
But the growth in Windows revenue from enterprise is not sustainable, Moorhead warned. At some point, Microsoft will have exhausted the supply of customers for those agreements, and failing a turnaround in PC sales and a surge in sales of Windows-powered tablets, the group's sales will stall.
"It's not sustainable in the long run," said Moorhead. "What we really need [to know] are how many Windows 8 PCs were sold and how many Windows 7 PCs were sold. That's the true demand for Windows."
But Microsoft's move -- going aggressive on enterprise agreements to prop up Windows' revenue -- is smart, Moor said, even if it's discounting those agreements: It gains some breathing room to get its mobile strategy in order.
"If you can lock [enterprises into Windows] for however long it takes to get competitive in tablets, you've won," said Moorhead. "They'd have bridged that gap [between PCs and tablets] during the transition, and mitigated the risk to the company's revenue."
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is email@example.com.
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