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Microsoft's Windows revenues plunge 30 percent

Dramatic drop caused by free upgrades to Windows 7

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, 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 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 licences 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."

No matter what the ledger book said, Microsoft continued to tout Windows 7's success, announcing today that it had sold more than 300 million licences since the October 2009 launch.

The last time Microsoft talked about Windows 7 sales was in late October 2010, when it said it had sold 240 million licences.

The 60 million copies sold since then translates into a pace of about 7 licences per second, down from the 8.4 licences per second between July 21 and October 12, 2010, as well as off the 9.97 licences per second sold during a 29-day stretch from June 23 to July 21, 2010.

Helm again pointed out that sluggish PC sales means just-as-sluggish Windows revenue growth. "Windows lives and dies by the PC market," he said. "And the PC market is seeing some impact in the consumer space from the iPad."

Although Microsoft did not mention the word "iPad" during the earnings call, one analyst asked about tablets and their impact on PC sales.

"Over the course of this year, some of the [netbook] volume has been replaced with other devices, including ultra-notebooks and tablets," said Peter Klein, Microsoft's chief financial officer.

Overall, Microsoft pegged its revenues at $19.85 billion, a record for the October-December quarter.

Sales from the company's Entertainment and Devices division, helped immensely by the success of Kinect and its halo effect on the Xbox 360 game console, grew by a whopping 55%, the best showing of any Microsoft group.

"I'd say Microsoft had a strong quarter considering what's going on in the PC market," Helm said.


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