The Cloud

Microsoft Beats (and Surprises) the Street

Despite the hype about phones and tablets, the Redmond giant’s 3Q results indicate that its core offerings still rule the enterprise.
David RosenbaumApril 20, 2012

Microsoft CFO Peter Klein said Thursday that sales of Windows the operating system that dominates and powers the vast majority of the world’s desktop computers rose 4% in the third quarter, even as worldwide PC shipments increased only 1.9% so far this year.

Windows software sales contributed to an almost $1 billion rise in Microsoft’s revenue compared with the third quarter of fiscal year 2011. Overall, said Klein, Microsoft saw 6% revenue growth year-over-year, achieving a third-quarter record of $17.4 billion, almost $200 million above estimates.

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During yesterday’s earnings call, Klein repeatedly received congratulations from analysts on a “very good quarter.” The praise was indicative of the analysts’ surprise at Microsoft’s performance given its perceived weakness in the very areassmart phones and tabletsthat Gartner research director Ranjit Atwal just last month called “more valued and attractive propositions” than PCs.

Gartner predicted that the PC market would be playing “catch up” in 2012. Indeed, a recent Accenture report noted that the acceleration of smart phone and tablet ownership was mirroring the slowdown in traditional desktop purchasing. “Consumers are adopting mobile technology so rapidly that the mobility trend is in hyperdrive,” said Accenture in its 2012 “Consumer Electronics Products and Services Usage Report.”

However, declarations of the death of the PC seem to be premature. The fact that individuals increasingly are using smart phones and tablets for work does not mean that enterprises are sunsetting their desktop infrastructure, or that they’re abandoning Windows, Office, and the rest of the Microsoft tools they have invested in and depended upon for so long. Klein allowed that he expected business PC purchasing to continue to outpace consumer purchasing, but he reported that the pipeline of enterprise renewals of Microsoft multiyear licenses was robust, again testifying to the company’s continuing strength in the enterprise.

Enterprise familiarity with Microsoft works in its favor even as companies plan their future cloud strategies. Klein reported a 14% increase in sales in Microsoft’s server and tools business (i.e., the SQL servers that store and deliver data from the relational databases at the heart of Big Data initiatives). He also announced the imminent release of Windows Server 2012, stating that with its virtualization, collaboration (through its SharePoint component), and, in its Premium edition, its business intelligence and analytics capabilities, it would be core to the move to public, private, and hybrid clouds. Both Klein and Microsoft general manager Bill Koefoed, who was with Klein on the call, repeatedly emphasized that SQL 2012 and the new Windows 8 operating system would “gain share” with the widening adoption of cloud computing.

The underlying message Klein and Koefoed wanted to convey (underscored by their repeated references to chief information officers) seemed to be that as enterprises set sail on the relatively uncharted, somewhat choppy seas of cloud computing, both technology and finance executives will look for a beacon in order to chart their course and find a familiar port, and nothing in the world of enterprise computing is as familiar to them as Microsoft.

At the same time, Klein wasn’t waving any white flags in the consumer space. The upcoming and highly anticipated release of Windows 8, with its touch-enabled user interface, is targeted at the mobile market: at tablets (where Microsoft currently has no presence), at phones, and at the so-called Ultra books, the next generation of lighter, thinner laptops. Windows 8 and other new, complementary releases constitute an attempt to wrest market share from both Apple’s devices and Google’s Android operating system.

Whether Microsoft can succeed in that effort and play a significant role in these consumer markets going forward is debatable, but its hold on business, in the United States and worldwide, apparently is not.