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Microsoft's Windows revenues plunge 30%

Says dramatic drop caused by $1.7B added to same quarter in 2009 for free upgrades to Windows 7

January 27, 2011 08:28 PM ET

Computerworld - Revenues from Windows plummeted 30% last quarter compared to the same period the year before, Microsoft said on Thursday.

But in an earnings call with Wall Street analysts on Thursday afternoon, Microsoft said that revenues from the Windows group actually increased by 3%. It called that "in line" with the quarter's global PC sales growth.

Windows revenue
Windows revenues fell 30% from the same quarter in 2009 when the spike and deferred upgrade income is accounted for.

The difference in the two numbers was due to the inflated revenue in the comparative quarter -- 2009's fourth -- which had been boosted by a Windows 7 pre-launch "spike," and by the $1.71 billion in revenue that had been deferred to account for the free upgrades Microsoft gave customers who bought Vista in the months just before Windows 7 debuted.

When the spike and deferred income revenues in 2009's fourth quarter are discarded, Microsoft said, Windows' revenues of $5.05 billion inched up that 3% from last year's $4.92 billion.

Four quarter revenues were 5% higher than the $4.79 billion in 2010's third quarter.

Rob Helm, an analyst with Directions on Microsoft, tried to explain Microsoft's accounting.

"When the launch 'spike' and the deferral are both ignored, Windows revenues climbed 3%," said Helm. "When just the spike is ignored, Microsoft took a 5% hit."

Only when both the spike and the deferral are included does the balance sheet show a 30% decline, he added.

Helm said that the Windows 7 launch spike boosted 2009's fourth quarter by $560 million. "My guess is that it's a matter of computer manufacturers buying a bunch of extra licenses then, anticipating the launch of Windows 7, and increased PC sales," he said.

But the number to focus on is "3%," the year-over-year increase in Windows revenues when all the deferred and spike-driven income is tossed aside. "It just shows how tightly Windows 7 sales are yoked to PC sales," Helm said. "When the PC market slows, so does Windows."

Earlier this month, both Gartner and IDC estimated global PC sales had climbed about 3% -- Gartner said 3.1%, IDC said 2.7% -- in the last three months of 2010 compared with the same timeframe the year before.

Microsoft noted several times that consumer PC sales slowed dramatically last quarter, adding that netbook sales had been particularly soft. Business PC purchases, however, were up. And Windows' sales reflected those trends.

"Netbook sales were eaten away to some degree by the iPad, and consumer PC sales slowed," Helm said. "What saved the company was that businesses are in the midst of a massive upgrade cycle."



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