Windows drops to No. 3 cash-cow status in Microsoft' latest quarter

Microsoft's two biggest cash cows in its second quarter were the Business Division and Server & Tools -- not Windows.
Written by Mary Jo Foley, Senior Contributing Editor

Windows and Office: They've been Microsoft's two biggest cash cows since... forever.

But in Microsoft's second fiscal 2012 quarter ending December 31, 2011, Windows/Windows Live dropped to No. 3, behind the Microsoft Business Division (home of Office) and Server and Tools. (Last quarter, the Business division was No. 1 and Windows was still No. 2.)

(click on breakout above to enlarge)

Total Microsoft revenues for the quarter were $20.9 billion.

For the past couple of weeks, Microsoft officials had been warning investors that PC shipments were going to be worse than many had expected due to flooding in Thailand. So it's not too surprising that Windows/Windows Live revenues were down six percent and profits down 11 percent.

But Windows' decline was offset by strong performance by the Business Division and Server and Tools, with $6.3 billion and $4.8 billion in revenues, respectively. Strong performances by Office, SharePoint, Exchange, Lync and Dynamics CRM all contributed to the Business Division's bottom line, according to Microsoft execs. Windows Server, SQL Server and System Center all turned in strong sales in Server & Tools, company officials said.

It's worth noting that even though the Entertainment & Devices unit had strong sales but lower profits than the previous quarter. E&D is home of the Xbox and Windows Phone businesses.

GeekWire said that lower net income in this unit came from "the cost of integrating Skype following the  completion of that acquisition, payments made to Nokia related to Windows Phone strategic initiatives, higher Xbox Live royalty costs, and a higher mix of Xbox 360 hardware sales vs. software, which takes a toll on the company’s profit margins."

But back to Windows. While Microsoft execs have said they still believe they can sell millions of more copies of Windows 7 before the big Windows 8 push commences, the next quarter could be a tough one for this unit. (Microsoft officials said they've sold 525 million copies of Windows 7 to date.) There's still no official word when Microsoft will RTM or launch Windows 8, but it's highly, highly unlikely that will happen before March, 2012 -- which is when the next quarter ends. Impact of the Thai floods on PC shipments is likely to continue into Q3 2012, as well, the Softies have said. I'm thinking the Business Division and Server & Tools are likely to carry the day, again, when Microsoft reports earnings next month.

For a company where nearly every strategy decision has revolved first and foremost around Windows, Microsoft is entering a new realm where its biggest financial contributors are outside of its most famous product. Is this a sign of the infamous 'post-PC era,' or just a temporary blip that will change once Window 8 is out? Should be an interesting year, this calendar 2012....

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