Windows' cut of Microsoft revenue drops to two-year low

Q4 Windows revenue and income shares were at their lowest levels since the last months of Vista

Windows' contribution last quarter to Microsoft's revenue hit its lowest point since Vista's swan song more than two years earlier, according to figures released by the company Thursday.

For the quarter ending Dec. 31, 2011, the Windows division accounted for 22.7 percent of the company's total sales, its lowest share since the 20.3 percent that the group recorded during the third quarter of 2009, at the end of Vista's reign and just weeks before Windows 7 launched.

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"Microsoft's Windows division continued to slide," said Allan Krans, an analyst with Technology Business Research, in an email late Thursday. "This marked the fifth consecutive quarter of incremental or negative revenue growth for the division."

Windows revenue for 2011's final quarter was $4.74 billion, down 6.1 percent from the $5.06 billion in the same period the year before. Microsoft's total revenue last quarter was $20.89 billion.

Since Windows' peak in the final quarter of 2009 -- Windows 7 launched in the middle of that three-month period -- the operating system's portion of Microsoft's revenue has been shrinking. Windows' share has fallen almost 14 percentage points since late 2009, when the division accounted for 36.3 percent of Microsoft's revenue.

Windows' contribution to Microsoft's operating income -- revenue minus expenses, before taxes -- has followed the same downward trend: Windows' 35.7 percent share of operating income last quarter was the lowest since the 32.6 percent posted in 2009's third quarter.

Not surprisingly, Windows dropped to third in Microsoft's revenue lineup last quarter, falling behind both Office and the company's server software. The last time that Windows failed to take the No. 2 spot among the company's groups -- it's long lagged behind the Business division, which does Office -- was also in the third quarter of 2009.

But Windows' revenue dip wasn't a surprise.

Last week, Microsoft executives set the stage by warning that research firms may have underestimated the fall off in PC sales. At the time -- and during a conference call with financial analysts Thursday -- Microsoft pinned blame on flooding in Thailand last year that crippled factories and tightened supplies of hard disk drives.

Krans said Windows' problem wasn't limited to parts shortages.

"While the latest decline ... can be attributed in part to decreased PC shipments caused by 4Q flooding in Thailand ... the 4Q11 result follows the recurring trend of decreased PC shipments and resulting decline in Windows sales," said Krans, noting the correlation between PC and Windows sales.

Also last week, both Gartner and IDC said PC sales were off last quarter, down between 0.6 percent and 1.4 percent.

During Thursday's earnings conference call, however, Microsoft cited gloomier numbers than the research firms.

"Factors such as the flooding in Thailand, macroeconomic uncertainty and competing form factors resulted in an overall market that we estimate declined 2 percent to 4 percent," said Bill Koefoed, Microsoft's general manager for investor relations, during the prepared statement section of the call.

Microsoft is pinning its plan for a resurgence in Windows revenue on the next iteration of the OS, Windows 8.

"With the future release of Windows 8, we believe the ecosystem will benefit from the new range of capabilities and scenarios that it enables," said Peter Klein, Microsoft's chief financial officer.

Krans went further. "Windows 8 ... will be a pivotal moment in the long-term durability of the Windows brand," he said.

Overall, Microsoft reported revenue up 5 percent over the same quarter a year ago, with the Server & Tools group boosting its operating income by 11 percent and the Business division up 3 percent.

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 gkeizer@computerworld.com.

See more articles by Gregg Keizer.

Read more about Windows in Computerworld's Windows Topic Center.

This story, "Windows' cut of Microsoft revenue drops to two-year low" was originally published by Computerworld.

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