In-Depth

15 Revelations in Microsoft's Financials

WEB EXCLUSIVE: The Windows Division may have been the star of Microsoft's recent Q2 FY'13 earnings report, but what other insights do the numbers reveal? RCP reads between the lines of Microsoft's latest financial earnings.

• By Scott Bekker
• January 28, 2013

Beyond the headline revenues and earnings from Microsoft's latest quarterly earnings report, investor calls and government filings provided myriad details about what's going on with different products deeper in the business.

Here are 15 interesting tidbits from the U.S. Securities and Exchange filing and the investor call on Thursday evening:

1. Ahead of Microsoft's earnings, media reports were filled with rumors of disappointing Surface sales. Microsoft did nothing to dispel those rumors in its earnings call and public statements. Microsoft's longstanding practice is to share shipment numbers and percentages only when the news is extremely good. There were no numbers shared for Microsoft Surface RT sales in the October-December period that coincided with the launch of Microsoft's first stab at PC hardware.

Microsoft executives did try to paint a positive picture, but with vague statements. For example, Microsoft CFO Peter Klein told analysts that Microsoft "recently increased production" in the Surface family. Does that mean Microsoft produced more Surfaces than it expected to at this time, or is it that Microsoft is now producing more kinds of Surfaces (RT and Pro) than before?

2. Few on Wall Street know as much about Microsoft as Rick Sherlund, a pivotal figure in Microsoft's IPO decades ago. So when Sherlund makes an observation about Microsoft's changing business model, it's worth paying attention. Here's what Sherlund said in the investor call, according to a Microsoft transcript: "It looks like what we're seeing is this transition in the business. It looks like it's more instead of business transactional it's more multi-year licensing. And the bookings growth would suggest that business is changing to be more revenue over time versus up front. I just wanted clarification, if I'm thinking about that correctly."

Microsoft's Klein assured Sherlund that he was "thinking about it absolutely correctly."

3. Microsoft Office struggled with consumers in the quarter, and its growth overall was underwhelming. The Microsoft Business Division, which is mostly Office, saw overall revenue increase by 3 percent. Components of that included a 2 percent decline among consumers and a 4 percent increase among business customers. In the discussion in the S.E.C. filing, Microsoft said consumer sales did slightly better than the declining global PC market.

4. Remember all that talk about hockey stick-like growth with Microsoft Lync? It's still going on. Microsoft says Lync revenues for the quarter increased by 35 percent.

5. Another enterprise server business with some legs is database sales. Microsoft reported that SQL Server revenues grew 16 percent, driven by strength in SQL Server Premium.

6. Speaking of SQL Server, Microsoft's Klein highlighted a trend in enterprise deployments. During the investor call Thursday, Klein said, "We're seeing large enterprise customers re-platform on SQL for any number of things underneath their ERP, underneath what other major sort of LOB apps they have that sort of drive their business.  And that's really an emerging trend with 2012 and what that does."

7. As Microsoft moves to stay competitive with virtualization and management of virtualized data centers, the Microsoft System Center product line is growing in importance. Even ahead of the release of Service Pack 1 for System Center, which was the piece that turned on a lot of features of Microsoft's new "Cloud OS," the System Center suite is growing fast. Microsoft reported an increase in System Center revenues for the quarter of 18 percent.

8. Speaking of Microsoft's tendency to provide numbers when products are successful, Windows Server was notably missing. There was a new version out during the October-December quarter in Windows Server 2012, but there was no discussion of any revenue growth on that product line.

9. In the area of Windows numbers, Microsoft repeated its earlier claim that 60 million licenses of Windows 8 have been sold. What was new is that the company provided some clarity on the drivers of those licenses. The three biggest contributors to revenue growth in the Windows business were "retail upgrades, sales of Surface and the enterprise annuity business, which continues to grow double digits," according to Klein. In response to questions he said OEM inventory buildup was a "tailwind" but he implied that the other three factors were more important.

10. One drag on Windows 8 sales has been a lack of Windows 8 systems for purchase, especially touch-capable models with compelling prices. Microsoft said the number of Windows 8 certified systems has nearly doubled since the October launch.

11. The number of apps in the Windows store has quadrupled since the October launch. The claim seems consistent with RCP's own tracking of the growth in the number of apps in the U.S. version of the Windows Store. A Microsoft executive did recognize that "we clearly have more work to do."

12. According to Microsoft, Windows users have downloaded over 100 million apps to date. It's a good round number and an indication of Microsoft's continuing market power to command developer and customer attention. Still, with Apple in McDonald's-hamburgers-served territory when it comes to app download numbers (tens of billions), there's plenty of room for expansion.

13. Windows Phone sales were more than four times higher than they were last year. Those numbers are consistent with what Nokia reported for its Lumia line of Windows Phones earlier in earnings season. Microsoft at last seems to be catching some wind for its phones.

14. Nokia's commitment to the Windows Phone platform came with a substantial commitment of investments from Microsoft. Those payments continue. In a section of the 10Q on increases in costs of revenue for the second six months of 2012, Microsoft mentioned the payments to Nokia.

15. Skype usage is growing. Microsoft reported a 59 percent increase in minutes of calls to 137 billion in the quarter.

Related:

• Windows Division Leads Microsoft's Q2 Earnings Report
• Huge Launch Campaigns Affect Microsoft's Bottom Line