Windows sales defy predictions, grow 4%

All credit to businesses upgrading to Windows 7, says Microsoft

Stronger-than-expected sales of Windows helped Microsoft post a 6% increase in revenue for the first quarter of 2012, the company said yesterday.

The Windows and Windows Live division brought in $4.6 billion during the three months ending March 31, an increase of 4% over the same period the year before.

That was a turnaround of sorts: Windows' revenue for the quarter was just $112 million less than sales during the last three months of 2011, traditionally a strong quarter in the calendar because of holiday purchases of PCs. But in 2011's fourth quarter, Windows revenue was down 6% compared to the year before.

Business purchases of PCs -- Windows' revenue is directly tied to the sale of new machines -- fueled the gain, with system sales to companies up 8% year-over-year, while consumer computer sales, long sluggish, remained flat.

"The business PC is what really drove the Windows business," said Peter Klein, Microsoft's chief financial officer Thursday during an earnings call with Wall Street analysts.

Most analysts had expected a poorer performance, largely on the projections by Gartner and IDC, which initially predicted a PC sales slump but then last week raised their estimates, saying that shipments actually increased about 2% in the quarter.

Microsoft estimated that PC sales grew between 2% and 4% during the quarter.

PC sales have struggled to match previous periods because of tougher competition from tablets and smartphones for consumer dollars, and the lingering effects of a hard disk drive shortage sparked by flooding last year in Thailand.

The Windows group accounted for 27% of the company's revenue for the quarter, second behind the Business division, which handles the Office line. Windows' piece of the pie was larger than the previous quarter -- the division contributed 23% of all revenue in the last three months of 2011 -- but slightly less than the same period a year before.

Windows 7 continued to gain ground among corporate users, said Klein, who claimed that 40% of all enterprise desktops were running the OS. Klein did not name a source for that number, but Net Applications, which Microsoft's IE team regularly cites, said that 41% of all machines running Windows worldwide last month did it with Windows 7.

As executives touted the strong sales for Windows 7, they also, although only in the broadest strokes, reminded analysts of the upcoming Windows 8.

After noting that the next fiscal year -- which runs July 1, 2012, to June 30, 2013 -- will include an "unprecedented refresh" of the company's core products, Klein was upbeat about Windows 8, even though customers have seen only a beta of the desktop version and nothing at all on ARM.

"With Windows 8 and its availability on both x86 and ARM, we believe the ecosystem will capitalize on the new range of capabilities and scenarios Windows 8 enable," said Klein in prepared remarks.

Although executives divulged no new information about Windows 8's release date during yesterday's conference call, Bill Koefoed, the general manager of Microsoft's investor relations, said that the development of Windows 8 and Windows RT -- the official name for the version designed for ARM processors -- is "on our schedule."

Klein dodged a question from one analyst about revenue swings later this year caused by Windows 8 upgrade giveaways. "We haven't said anything and will not today, but we'll have more to talk about in terms of programs and promotions as we get closer to the launch date," Klein said.

With Windows 7, Microsoft offered free or nearly free upgrades to people who purchased a new Vista PC in the months before and after its launch. The company also aggressively discounted Windows 7 upgrades during a two-week pre-sale period. Microsoft may repeat one or both of those promotions with Windows 8.

If it does, the deals will impact the bottom line: Two years ago, Microsoft deferred $1.7 billion in revenue to account for the Windows 7 upgrades due Vista PC buyers.

Klein also sidestepped a question about whether Windows XP's looming retirement will create additional incentive to upgrade to Windows 7, or even Windows 8, and accelerate sales of those editions. "Obviously, it's high on the priority list for CIOs to upgrade their business desktop [from XP]," said Klein. "Exactly how that will play out over the next couple of years is hard to say."

XP will fall off Microsoft's support list in early April 2014.

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

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Copyright © 2012 IDG Communications, Inc.

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