Office 365 subscriptions furnish 4% of Microsoft's Office division revenue

Company bullish on rent-not-buy strategy's future as it touts $1B annual income

Microsoft's Business division, which manages the company's Office cash cow, recorded a 5% revenue bump in the first quarter over the same period in 2012, an increase driven by a surge in enterprises signing long-term licensing agreements.

Office 365, Microsoft's expanded subscription program that it's promoted for both businesses and consumers -- and on which the company is pinning plans to drive future income -- will account for about 4% of the division's revenue for the fiscal year, Microsoft said.

Revenue for the Microsoft Business Division (MBD) in the first quarter was $6.1 billion, 5% above 2012's first quarter when adjustments for a free Office upgrade program were excluded.

That contrasted with a flat quarter, year-over-year, for the Windows Division, which was harder hit by a serious slump in PC sales.

MBD's revenue boost stemmed from sales to businesses, which were up 10% compared to last year, said Chris Suh, general manager of investor relations, during an earning call last week. "[That was] driven by 16% growth in multi-year licensing," Suh said.

Microsoft has long relied on licensing deals struck with enterprises for the bulk of its Office revenue. Companies not only buy those licenses, but also sign up for, and pay extra for, Software Assurance, an annuity-like program that gives customers the right to future upgrades.

Recently, however, Microsoft has pitched Office 365 as an alternative, promoting the subscription plans' five-installs-per-user of Office 2103, and other benefits, to tempt customers into abandoning the traditional "perpetual" licenses -- those paid for once, then used as long as desired -- for the rent-not-buy programs.

Business customers pay between $12.50 and $20 per month per user -- or between $150 and $240 per year per user -- for Office 365. If a subscription expires, the locally-installed Office 2013 retreats to a reduced mode that won't let users create new documents or edit existing ones.

Last week, Peter Klein, Microsoft's outgoing CFO, stressed Office 365's importance to Microsoft's revenue strategy and touted its success.

"This quarter was our strongest ever [for Office 365], with net seat additions up five times over the prior year," Klein said. "One in four of our enterprise customers now has Office 365, and the business is on a $1 billion annual revenue run rate."

Those figures sounded impressive on the surface.

But Klein's comment that a quarter of Microsoft's enterprise customers had signed up for Office 365 does not mean that 25% of all Office licenses sold to businesses were, in fact, paid for by subscription.

As Wes Miller, an analyst with Directions on Microsoft, noted in an interview last week, few enterprises are wholly adopting Office 365's new payment structure. Instead, the bulk of companies are -- and will for some time -- rely on a hybrid approach where they purchase most Office licenses outright and subscribe to Office 365 for the remainder.

Nor does the $1 billion annual revenue from Office 365 account for a significant portion of MBD sales.

Over the last four quarters -- from April 1, 2012 to March 31, 2013 -- MBD revenue was $23.8 billion. Using that number, $1 billion from Office 365 would represent 4.2% of the total.

Still, Klein highlighted Microsoft's hopes for Office 365, even as he warned Wall Street analysts it would impact revenue in the short term.

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