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Windows, Surface and phones post revenue declines as Microsoft's MPC segment falls 17 percent

Gregg Keizer | Oct. 26, 2015
Hardware and OS anchor turns into dead weight that drags down growth in cloud business.

Microsoft refreshed the Surface Pro and introduced the Surface Book, its first-ever laptop, two weeks ago. Revenue from sales of the new devices won't show up on Microsoft's books until January 2016.

Microsoft's revamped reporting -- and what it includes in filings with the U.S. Securities & Exchange Commission (SEC) -- make it impossible to now even guess at the Surface line's profitability. (The last time Computerworld, with Dawson's help, estimated the Surface's gross margin -- in April for the first quarter of 2015 -- the number was 19.2%, far below the 90%-and-up gross margins of the Windows and Office software segments.)

Things were somewhat clearer on Windows' revenue: Overall, the OS money maker brought in 7% less, with revenue down $322 million from the September quarter of 2014. Within the Windows whole, revenue from license sales to OEMs (original equipment manufacturers) was down 6%, while licensing Windows to enterprises was off 3% (but up 4% when foreign currency headwinds were eliminated).

Although still in contraction, Windows' revenue downturn was not as steep as previous periods. In the June quarter, for example, Microsoft reported a revenue decrease of 22% in OEM licenses, the third quarter running with double-digit declines.

Nor were the reductions as large as Microsoft had expected, said Hood. "The way to think about the early signs of the impact [of Windows 10] were the strong device mix, some higher-priced units across a wide variety of OEMs as we build into holiday, did provide some slightly better-than-expected results," she said when answering an analyst's question during the call.

Both Hood and Nadella also made a point to highlight Microsoft's Bing search business, and credited the 23% increase in its revenue -- and the fact that it finally turned profitable -- to the knock-on effect from Windows 10. The new OS ties tightly into Bing within the default Edge browser, the in-OS search feature, and the Cortana digital assistant technology.

"Some of the other upside that we saw in the quarter was from things that are the second sort of derivatives of [Windows 10], which was our search results were better than we had thought," Hood said.

Microsoft has long featured Bing as one of the ways it planned to monetize Windows 10, especially the free upgrades it will give away through July 2016.

Microsoft may not have acknowledged the negative impact of those upgrades on revenue -- instead, Nadella trumpeted the fast adoption pace of Windows 10, again citing that it had reached the 110 million mark -- but Dawson wasn't as shy.

"Normally, you'd see a big spike [in revenue] at a Windows launch, but there's the [free] upgrade this time," Dawson said. "It's not going to have the same positive effect [as previous Windows launches]."

 

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