Microsoft Windows Sales Inch Up, Despite PC Slowdown

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Microsoft Windows sales revenues inched up four percent during the first three months of this year, despite a slowdown in PC sales, while Office 365 adoption forged ahead, Microsoft officials said in a conference call.

Painting a bright picture for the future prospects of the Windows OS, Microsoft CFO Peter Klein reported profits of $6.06 billion for Microsoft’s third quarter of the 2013 fiscal year, an 18 percent rise over the same quarter a year ago.

‘We Are Excited by the Opportunities Ahead’

“We are excited by the opportunities ahead of us. We built Windows 8 with touch and mobility at the center of the experience, which positions us well in this new era. However, the transition is complicated, given the size of our hardware and software ecosystem. We still have an immense amount of work to do, yet we feel good about the foundation we have laid and are optimistic about the long-term success of Windows,” he said, during a financial call with analysts on Thursday.

“Looking ahead, we will release the next version of Windows, codenamed “Windows Blue”, which further advances the vision of Windows 8 as well as responds to customer feedback.”

Facing competition from Apple’s iPad, resistance by many customers to Windows 8′s Modern/Metro user interface, and a relatively small selection of apps in the Windows Store, Microsoft suffered a drop in overall Windows sales during the last three months of 2012.

Klein, though, contended that the number of apps in the Windows Store has increased sixfold since the launch of Windows 8 in November.

Also since the launch, he said, Microsoft has delivered “several important updates to improve out mail, storage, search, music, and video services.”

Assortment of Windows 8 Tablets Improving, but What about RT?

During the quarter, Microsoft released Microsoft Office 13, Office 365 Home Premium, new business editions of Office 365, and the Surface Pro, an Intel-based tablet that runs Windows 8.

The Surface Pro “combines the performance capabilities of a PC with a modern tablet design,” according to Klein.

“The assortment of touch-enabled devices that are built for Windows 8 by our OEM customers is also improving.”

Yet officials made no mention during the call of ARM-based tablets, such as Microsoft’s original Surface, which run Windows RT rather than Windows 8.

Last month, Bloomberg reported that Microsoft only sold one million RT-based Surface tablets from October of 2012 through March of this year, in contrast to four million units of its Windows 8-enabled Surface Pro in just over a month.

Meanwhile, according to figures released earlier this month by IDC, worldwide PC shipments fell 13.9 percent during the first three months of 2013. Bob O’Donnell, an IDC analyst, blamed Windows 8′s heavy reliance on touch gestures and its “radical” changes to the traditional Windows interface as slowing the PC market as a whole.

Klein, though, maintained that “We are hard at work here at Microsoft and with our partners to drive Windows 8 adoption forward. At the same time, we have strong momentum in our enterprise businesses, including our cloud services. Combined with our unique consumer assets like Xbox Live and Skype, we are well positioned to deliver on our devices and services strategy.”

‘Continued Progress in Transition of XP to Windows 7′

Microsoft also generated revenues during the quarter through sales of Windows 8 upgrades for existing Windows 7 PCs, and through a 14 percent increase in its server and tools business, for instance.

On the enterprise side, at least, Microsoft “saw continued progress in the transition of Windows XP to Windows 7,” said Chris Suh, general manager of investor relations, also during the call. Two-thirds of enterprise desktops are now operating Windows 7, according to Suh.

Officials did not say how many enterprise desktops are now running Windows 8, although enterpise adoption of new OS is customarily slow. In migrating XP desktops to Windows 7, however, Microsoft is again selling software for legacy PCs, as opposed to generating demand for new PCs with a new OS aboard.

Office 365 Takes Hold in Enterprises

Klein pointed to increased adoption of Office 365 in enterprises, however. “Office 365 lights up with this latest release, as evidenced by our growing customer adoption. This quarter was our strongest ever, with net seat additions up five times over the prior year. One in four of our enterprise customers now has Office 365, and the business is on a $1 billion annual revenue run rate,” according to the CFO.

In a Q&A session that followed, Klein suggested that Office 365′s subscription-based pricing model will generate long-term revenues for Microsoft.

“[As] people move from what may have been a transactional to a perpetual license, where the revenue is recognized up front, to a subscription service, where it’s recognized ratably, [you're] basically deferring the rest of the term of the subscription. So in the short term, you’ll be deferring revenues that were not in a subscription, and would have been recognized immediately,” he said.

Also on Thursday, though, Microsoft announced that Klein will be leaving his job as CFO at the end of the current fiscal year in June, after four years with the company. During the call, Klein cited his wishes to spend more time with his family as the reason behind his resignation.

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