Windows Phone 7 News, Strong Revenues Marked Microsoft's Week

Microsoft's week involved Windows Phone 7 reaching its "technical preview" milestone, and the company announcing stronger-than-expected quarterly results.

Symbolically, it could have been a very bad week for Microsoft: As the company headed into the July 22 earnings announcement for its fiscal fourth quarter, a number of Wall Street analysts were predicting quarterly revenues of $15.2 billion. That would be more than enough for most companies, but it would also lag behind Apple's revenues of $15.7 billion.

Ten years ago, the idea of Apple surpassing Microsoft in quarterly revenues would have seemed impossible, the fever dream of a Mac obsessive. Although Microsoft's actual revenues of $16.02 billion placed the company ahead of its desktop-and-smartphone rival-at least for the moment-the closeness of their respective numbers suggests that mobile devices have truly begun to eclipse PCs; Apple's revenues were largely buoyed by sales of its iPhone and iPad.

In turn, that renews pressure on Microsoft to deliver with Windows Phone 7, its smartphone operating system due by the end of 2010. On July 18, Microsoft announced that the platform had reached its "technical preview" milestone, a week after it released Windows Phone Developer Tools Beta.

"Starting today, thousands of prototype phones from Asus, LG and Samsung are making their way into the hands of developers," Terry Myerson, corporate vice president of Windows Phone Engineering, wrote in a July 18 posting on The Windows Blog. "So we're almost there-but there is much work left to do. Together, with our early adopter customers, developers, OEMs, and mobile operator partners we are in the home stretch."

Microsoft added that more than 1,000 Microsoft employees had been testing Windows Phone 7 over the past months, specifically for metrics such as battery life, usability and network connectivity; the rest of the company's work force will be given devices loaded with the OS upon their release.

While Microsoft's share of the smartphone market has been on the decline for several quarters, executives at last week's Worldwide Partner Conference insisted that Windows Phone 7 had a chance to reverse that trend.

"The phone is going through a massive inflection point," Andy Lees, senior vice president of Microsoft's Mobile Communications Business, told an audience during his July 13 keynote address at the conference. "There's immense competition but, in many respects, things are just beginning."

Microsoft hopes that the unique interface of the OS, which consolidates Web content and applications into a series of subject-specific Hubs, will attract both consumers and businesses.

Whether or not Microsoft eventually succeeds in its smartphone efforts, though, its quarterly results indicate the company will need to rely on its traditional properties, such as Windows and Office, for the bulk of its revenue for some time to come.

Microsoft's Windows division reported revenues of $4.5 billion, up from $3.2 billion during the same quarter last year. On top of that, Microsoft's Business division pulled in $5.3 billion, hinting at an uptake in enterprises and SMBs software-spending after several quarters of slashed IT budgets. At the same time, however, its much-touted cloud initiatives have not begun to generate equivalent cash flow.

"Microsoft's messaging around cloud is becoming increasingly aggressive, but its execution in traditional businesses had revenue pouring in during [the quarter]," Allan Krans, an analyst with Technology Business Research, wrote in a July 22 research note. "Windows 7 and Office 2010 have generated significant growth despite the ongoing economic uncertainty."

Other analysts suggested that Microsoft could need to rely on those traditional businesses, and the revenues they generate, for some time to come.

"We think it's too early to see a boost from Kinect (formerly Project Natal) units, which are slated to start shipping in early November," Katherine Egbert, an analyst with Jefferies & Co., wrote in a July 19 research note. "We don't see Bing search or Azure cloud services add meaningfully, despite recent market share gains and customer wins."

In other words, Microsoft seems to find itself in something of a transition period. On one hand, it seems to have handily survived the economic devastation that gripped much of the tech industry in 2009. On the other, the company's attempts to move beyond its core businesses-no matter how profitable those businesses may be-have yet to become profitable.