Microsoft masks Windows, Office performance with new reporting format

Revamped financial reports 'purposefully ... cover the ailing Windows client business,' says IDC analyst

Microsoft's new financial reporting format makes it much harder to get a grip on how two of its most important software franchises, Windows and Office, are performing, an analyst said Friday.

And the company did that deliberately, contended Rajani Singh of IDC.

"There's no way we can figure out how Windows and Office are doing," said Singh in an interview. "They're purposefully using [the new format] to cover the ailing Windows client business. They are gradually transitioning to the new strategy, and although Surface RT has done relatively well, better than we expected, in the meantime they have to cover the ailing Windows division. They've tried to hide it a bit by spreading it into several segments."

Singh was referring to the new format that Microsoft used for the first time Thursday as it reported third-quarter revenue of $18.5 billion, or about $700 million more than Wall Street expected.

The format changes were made after Microsoft announced this summer that it would reorganize the company by dumping the product-specific divisions -- including one for Windows, another responsible for Office -- and instead mashing multiple products into new groups, and in some cases dividing revenue from one product line into several of those groups.

Microsoft is now organized into two large divisions -- Devices and Consumer (D&C) and Commercial -- that, in turn, are split into three and two buckets, respectively. Windows revenue, which was previously reported in a single division, now appears in three of the five buckets: D&C Hardware, which contains the Surface tablet line; D&C Licensing, where sales of Windows to computer makers is reported; and the Commercial division's Licensing group, which includes sales of Windows to large enterprise customers as well as Windows revenue from Software Assurance, an annuity-like program that gives customers the right to upgrade to newer editions.

"There's no way we can figure it all out," said Singh, of wrestling with the new format in an attempt to parse Windows' performance.

Fortunately, Microsoft also listed the third-quarter numbers in the old format for comparison purposes. It's not clear how long it will continue to report revenue in both the old and new formats, however.

In the old format, Windows generated $4.6 billion, up 4% from the same period in 2012 and triple what Microsoft told Wall Street in July to expect, when it forecast a 2% decline. But operating income -- earnings before taxes -- sunk to $2.2 billion, a decline of 20% from last year.

On Thursday, Microsoft credited the better-than-anticipated revenue to increased sales of its Surface tablets, particularly the heavily discounted Surface RT; a 6% growth in Windows licensing to OEMs for business PCs; and to some extent, the ramp-up for the holiday selling season by computer manufacturers, which built up inventory for expected sales in November and December. Overall, however, Windows sales to OEMs (original equipment manufacturers) were down 7% from the year before because of a major slide of 22% on the consumer side.

Microsoft earnings chart
Under the old financial reporting format, it's easy to see how Windows and Office did in the third quarter compared to the same period last year. (Data: Microsoft.)
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