Microsoft's third quarter for fiscal 2011 was a bang-up one for Office, and a not-so-great one for Windows.
Some time during the past three months, Office 2010 moved from being Microsoft's "biggest consumer version of Office in history" to the "biggest version of Office in Microsoft's history." Meanwhile, Windows revenues declined four percent from the year-ago quarter with Microsoft still expected to be more than a year away from delivering a new version of Windows.
For years, Microsoft has been a two-trick pony. Even today, Windows and Office continue to bring in the majority of Microsoft's revenues -- revenus that have fueled the other businesses Microsoft is nurturing to help itself diversify its product base.
In the quarter that ended in March 2011, the Microsoft Business Division had $5.25 billion in sales, and $3.16 billion in operating income. Windows/Windows client had $4.4 billion in sales and $2.76 billion in operating income. Chief Financial Officer Peter Klein noted that consumer PC shipments, primarily netbooks, dropped 8% in quarter. The rise of tablets was to blame, in part, he said.
Windows sales have been mostly steady since the introduction of Windows 7 in October 2009. But this quarter's $4.4 billion is the lowest Windows/Windows Live revenues have been since just before Windows 7's introduction in fiscal 2010.
Windows/Windows Live revenues per quarter (in billions)
Q3 FY11 4.4 (Jan 11 - March 11) Q2 FY11 5.1 (Oct. 10 - Dec. 10) Q1 FY11 4.8 (July 10 - Sept. 10) Q4 FY10 4.6 (April 10 - June 10) Q3 FY10 4.7 (Jan. 10 - March 10) Q2 FY10 7.2 (Oct. 09 - Dec .09) ** Windows 7 launched October 2009 Q1 FY10 2.9 (July 09 - Sept.09)
There's still quite a bit of time left before Microsoft is expected to launch Windows 8. If Microsoft continues along its expected and usual trajectory, Windows 8 PCs and tablets aren't likely to debut until holiday 2012. Microsoft is really counting on strong business demand for Windows 7 PCs -- as well on new Windows 7 tablets to keep demand moving in the coming months.
Luckily for Microsoft and its partners, Microsoft's other cash cow, Office 2010, is picking up the slack.
Office division revenues per quarter (in billions)
Q3 FY11 5.3 (Jan 11 - March 11) Q2 FY11 6.0 (Oct. 10 - Dec. 10) Q1 FY11 5.1 (July 10 - Sept. 10) Q4 FY10 5.3 (April 10 - June 10) ** Office 2010 launched May 2010 Q3 FY10 4.3 (Jan. 10 - March 10) Q2 FY10 4.9 (Oct. 09 - Dec. 09) Q1 FY10 4.5 (July 09 - Sept. 09)
We don't know at this point when Microsoft will deliver Office 15, the next version of Office (the rumor is 2013), but the Softies increasingly have been diversifying the set of products that contribute to the Office division (Microsoft Business Division), with server-based products (SharePoint, Exchange, Lync), the cloud-based versions of those products (BPOS/Office 365) and the client licenses (CALs) of these products.
To be fair, Microsoft's Server and Tools business -- and especially in the most recent quarter, the Xbox division, thanks to sales of the Kinect sensor -- have been acting as healthy cash calves themselves. (Server & Tools contributed $4.1 billion this quarter -- almost as much as Windows client.) The Online Services Division, plagued by Yahoo ad-platform transition problems, not so much...
The biggest questions in many Microsoft analysts' minds remain whether and how quickly Microsoft can count on products outside of the Windows and Office divisions to make up the shortfalls when market changes happen -- such as the netbook market tanking or the tablet market roaring off and leaving Microsoft at the curb. It was great for Microsoft that it had the Office division to fall back on this quarter. But if/when the Office feed bag starts to empty, will there be new Microsoft cash cows lined up to provide the milk?