Office revenue smells sweet even as PC sales stink it up

Consumer sales plummet 27%, but business revenue salvages both Office and the company's overall quarter

Microsoft's Business Division (MBD), the company's biggest money maker for 10 out of the last 11 quarters thanks to its Office cash cow, was not immune to the historic decline in PC sales, Microsoft acknowledged Thursday.

MBD recorded revenue of $6.43 billion for the quarter ending June 30, 1.7% more than the same period the year before. But revenue from the consumer side took a steep dive on a combination of weak consumer PC sales and the impact of the shift toward subscriptions, which are not immediately booked as revenue but recognized over the life of the subscription.

"As our customers transition to the new subscription model, there is a short-term impact to revenue due to the changes in the timing of revenue recognition, but over time we expect our revenue to grow and become more recurring and predictable," said Chris Suh, Microsoft's general manager of investor relations, in prepared remarks during a conference call with Wall Street analysts.

Microsoft launched an expanded line of Office 365 rent-not-buy plans earlier this year, including Home Premium for consumers, as part of its new devices-and-services strategy. For Office, the strategy means drawing customers away from traditional "perpetual" licenses and pushing them toward recurring subscription payments.

Consumer-generated Office revenue was $1.5 billion, which included $782 million in deferred revenue from last year's free Office 2013 upgrade offer. Minus the deferred revenue, MBD booked $772 million in consumer sales, down 27% from 2012's second-quarter $995 million.

Fortunately for Microsoft, sales of the suite to businesses offset the consumer decline. On the commercial side, which generated almost 88% of the division's sales, revenue was up 7%, said Microsoft. Much of that came from a double-digit increase in annuity payments, another way of referring to Microsoft's Software Assurance programs, which give volume license customers -- mid- to large-sized companies -- free upgrade rights as long as they keep paying.

MBD was again the engine that drove Microsoft, contributing 36.3% of the company's total revenue for the quarter, the most of any unit.

Microsoft said that it had 1 million Office 365 Home Premium subscribers on the books, although unlike in May, when it first touted the number, company officials today tacked "more than" onto the figure.

Assuming an even 1 million subscribers to Home Premium, the subscriptions would generate $100 million annually. Impressive, but just a drop in the bucket of Microsoft's current projection of $1.5 billion in annual revenue from all Office 365 subscriptions. Consumer subscriptions to Office 365 thus accounted for only 7% of all Office 365 revenue.

That's a smaller percentage than the 12% that consumer sales generated for Mud's total, implying that consumers are slightly less enthralled with the subscription concept than enterprises -- not surprising since the latter are long accustomed to paying for the subscription-like Software Assurance.

Some analysts have called on Microsoft to produce and release Office on iOS and Android, and speculated that the company could reap billions from sales of such software. Microsoft delivered a subset of Office for the iPhone, the Office Mobile app, a month ago, but it has refused to commit to a suite for Android or Apple's iPad.

The quarter's numbers, however, seem to show that Microsoft's current approach of denying Office to Android and the iPad isn't hurting its ability to milk the suite, as it was able to grow MBD revenue even as PC shipments took a pounding for the fifth quarter in a row.

Likewise, there are clues that the strategy it's adopted for Office Mobile -- tying the iPhone app to Office 365 -- has potential: From March to June, projections of Office 365's annual income grew an amazing 50%, indicating that there are plenty of users able to run subscription-linked apps.

But Microsoft knows it has it has a hard row to hoe on its entire portfolio, including Office.

"I want to be very clear, we know we have to do better," said Amy Hood, the company's new CFO, during the call with analysts Thursday. "That's one reason we made the strategic and organizational changes we made last week. A transition of this magnitude takes time. We are confident we are moving in the right direction."

This article, Office revenue smells sweet even as PC sales stink it up, was originally published at Computerworld.com.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at  @gkeizer, on Google+ or subscribe to Gregg's RSS feed . His email address is gkeizer@computerworld.com.

See more by Gregg Keizer on Computerworld.com.

FREE Computerworld Insider Guide: IT Certification Study Tips
Join the discussion
Be the first to comment on this article. Our Commenting Policies