Microsoft Reports Strong Windows 7 Sales, Revenue Growth

Microsoft reported an uptick in revenues during its third-quarter earnings call on April 22, with its Windows division buoyed by strong sales of the Windows 7 operating system. Year-over-year revenue also climbed for its Server and Tools, Online Services Division, and Entertainment and Devices Division. Although Microsoft's business division revenues were slightly down year-over-year, Microsoft executives indicated that they were seeing the beginnings of increased business spending in areas such as desktops and cloud-computing services.

Microsoft reported positive news during its fiscal 2010 third-quarter earnings call on April 22, with revenues climbing 6 percent year-over-year to $14.50 billion. Operating income, net income and diluted earnings per share also rose by double-digit percentages, which the company seemed to attribute to continued strength in Windows sales along with positive traction in other areas.

Those financial results included a $305 million deferral of revenue from the Microsoft Office 2010 Technology Guarantee program, according to Microsoft.

"Windows 7 continues to be a growth engine, but we also saw strong growth in other areas like Bing search, Xbox Live and our emerging cloud services," Peter Klein, Microsoft's chief financial officer, wrote in an April 22 statement ahead of the earnings call. "Our record third-quarter revenue along with continued rigor on cost management resulted in exceptional EPS growth."

But part of that growth, Microsoft executives seemed to suggest, also came from businesses opening their wallets a crack for IT infrastructure, a change from the past several quarters' relatively stagnant spending due to the effects of the long-lasting global recession.

"Business customers are beginning to refresh their desktops and the momentum of Windows 7 continues to be strong," Kevin Turner, Microsoft's chief operating officer, also wrote in an April 22 statement. "We are also seeing tremendous interest in our market-leading cloud services for business."

During the earnings call, Klein suggested that the quarterly numbers were indicative of "strong product momentum" along with a "return in business hardware spending." He cited Bing's 10 consecutive months of growth, the commercial availability of Azure in 41 countries, Windows 7 being the company's fastest-selling operating system, and the announcements of Windows Phone 7 and Kin as evidence of that momentum.

Bill Koefoed, Microsoft's general manager of Investor Relations, told media and analysts during the call that Microsoft saw "renewed strength" in the SMB (small to midsize business) market, with 15 percent year-over-year growth. Enterprise spending, he said, was "in the beginning of a recovery, but with lengthened sales cycles." Demand in business PCs, he added, was up 15 percent year-over-year.

However, the actual financial statements released by Microsoft ahead of the earnings call suggested a somewhat more mixed story. Revenues for the Windows & Windows Live Division were $4.4 billion, a substantial increase from the $3.4 billion reported in the same quarter for 2009, before the release of Windows 7; on the other hand, revenues for the Microsoft Business Division were $4.2 billion in 2010, somewhat below the $4.5 billion reported in 2009. Year-over-year quarterly revenue for its Server and Tools, Online Services Division, and Entertainment and Devices Division were also up slightly.

Microsoft found itself hard-hit by the global recession as businesses cut back on their IT spending. The company reported a 17 percent year-over-year revenue decline for the fourth fiscal quarter of 2009, followed by a 14 percent decline for the first fiscal quarter of 2010. In the face of those pressures, Microsoft instituted a round of belt-tightening, including layoffs of more than 5,000 employees through the course of 2009.

Although Microsoft remained cautious about Windows 7's commercial prospects following its October 2009 release, the operating system proved to be a solid hit with consumers, selling some 90 million licenses by March 2010. However, business spending refused to parallel that consumer uptick, with Koefoed telling media and analysts during a Jan. 28 earnings call that "we have not seen a return to enterprise growth" and that "weak business PC sales" continued to be a drag on that market segment.

Analytics company Net Applications found in a January study that Windows 7 averaged a 7.57 percent share of the U.S. operating system market, compared with 66.15 percent for XP, 17.47 percent for Vista, 2.37 percent for Mac OS X, 1.80 percent for Mac OS X 10.6 and 1.02 percent for Linux. Microsoft claims that more than 10 percent of all PCs worldwide are running Windows 7.

In a possible bid to increase its adoption among enterprise users, Microsoft has undertaken initiatives such as extending its Windows 7 Enterprise Trial program, which offers a 90-day test of the operating system to IT administrators. But a true business refresh by firms running Microsoft products would likely have a far more substantial effect on the adoption of Windows and other software.