PC shipments stink less, may prop up Microsoft's Q3 revenue

Windows revenue should beat -2% forecast, assuming analysts can parse Microsoft's new reporting format; Chromebooks account for 1% of shipments

Microsoft will probably report better than expected Windows revenue when it issues its third-quarter earnings numbers on Oct. 24, according to estimates of PC shipments this week by research firm IDC.

By IDC's estimate, personal computer makers shipped about 81.6 million systems in the quarter that ended Sept. 30, or about 7.6% fewer than in the same period the year before. That number was slightly less than an earlier forecast by the Framingham, Mass. research company, which had changed its projections several times but finally settled on a 9.5% contraction for the quarter.

IDC credited some of the unanticipated uptick to increased purchases of new systems by businesses hustling to eradicate Windows XP before the support plug's pulled next April, with the remainder accounted for by OEMs filling their supply pipelines with machines for the holiday sales season.

The "XP-Effect" was "nothing crazy, nothing great," acknowledged Rajani Singh, an IDC analyst, in an interview Thursday. But it helped. "XP is bringing some volume," she asserted. "It moved the numbers upward a little bit."

While IDC doesn't have direct evidence of the extent of XP's contribution, it again used clues to reach that conclusion, including increases in shipments by companies historically much better at selling to enterprises than consumers, like Lenovo, HP and Dell. Lenovo posted a year-over-year increase of 2.2%, while HP and Dell were essentially flat, with gains of just 0.4% and 0.3%, respectively.

Consumer-oriented OEMs, on the other hand, including Acer and Asus, saw their numbers tank: Shipments at the two Taiwan-based OEMs dropped by more than a third compared to last year.

But the better-than-forecast results -- even though still dismal, as they made for the sixth straight quarter of falling shipments, a contraction of historic proportions -- should produce a small smile at Microsoft.

"September was very strong for Microsoft," said Singh, talking about Windows PC shipments.

In July, when Microsoft last reported earnings, CFO Amy Hood warned Wall Street analysts that the company expected PC shipments to fall by approximately 15% in the third quarter, and cause a 2% decline in Windows revenue.

Hood's forecast meant that Microsoft figured PC shipments would drop to about 75 million in the third quarter; IDC's estimate of 81.6 million was nearly 7 million above Hood's bet. (Research rival Gartner's estimate for the third quarter was almost the same at 80.3 million, although its projection of an 8.6% downturn was slightly worse.)

Because the bulk of the Windows division revenue has been from sales of licenses to OEMs for their new PCs, the higher shipment number could erase the expected 2% decline in revenue.

Or not.

Microsoft has also lumped Surface sales revenue into the Windows division, and while the steep discounts for the Surface RT, and the smaller price cuts for the Surface Pro during the quarter may have produced higher revenue for the tablets, it's a black hole at the moment: Microsoft has said nothing about Surface sales or revenue since July.

The wild card is that Microsoft has turned its financial reporting upside down and inside out. Under the new format, driven by the massive corporate reorganization Microsoft undertook this summer, the Windows business will be broken apart and parceled out to three different categories. Surface revenue will be reported as part of the Hardware group in the Devices and Consumer division (D&C), sales of Windows to OEMs will fall into the Licensing bucket of D&C, and volume licensing and Software Assurance sales of Windows to enterprises will be under the Commercial division's Licensing group.

But Microsoft also faces a new -- albeit small-sized -- challenger, according to Singh and IDC's data: Google, its Chrome OS and the resulting Chromebook hardware sold by an increasing number of long-time Microsoft hardware partners.

"Chromebooks were much stronger than anticipated," said Singh Thursday. She pegged the number of Chromebooks shipped globally at 640,000, or about 0.8% of the total, with especially strong sales of the inexpensive notebooks to the educational market. In some cases, said Singh, Chromebooks won out over Apple's iPad in those school sales.

Others have noticed the growth of Chromebooks. Last month, Stephen Baker of the NPD Group said that the laptops had accounted for 3.3% of all back-to-school sales in the U.S., with sales of about 175,000 units between from June 30 and Sept. 7.

Many of Microsoft's OEMs have at least experimented with Chromebooks. Hewlett-Packard, for example, introduced a $279 11-in. Chromebook just days before HP CEO Meg Whitman knocked Microsoft as an "outright competitor." Thursday, Acer unveiled a similarly-sized Chromebook at the even lower price of $249.

While no one is calling Google's Chrome OS a threat to Windows, the fact that OEMs have shifted to a multi-OS stance must give Microsoft pause, at the very least.

Microsoft will report its third-quarter earnings on Oct. 24 starting at 2:30 p.m. PT when it kicks off a conference all with reporters and Wall Street analysts.

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

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