The Windows division's share of Microsoft's revenue last quarter dropped to a four-year low as Windows 7 sales stalled before the launch of Windows 8, financial data released by Microsoft yesterday showed.
The Windows and Windows Live group posted sales of $3.2 billion during the three months ending Sept. 30, a drop of 33% from the same period the year before.
Revenue was reduced by the $1.2 billion that Microsoft deferred to cover sales of Windows 8 to computer makers preparing their new hardware for launch next week, and for a deal that debuted off in June which promises buyers of new Windows 7 PCs a $14.99 upgrade to Windows 8.
Even without those deferrals, the Windows division would still have posted a 9% downturn compared to the third quarter of 2011.
As it has for several quarters, Microsoft again blamed poor PC sales for the weak Windows numbers.
Peter Klein, Microsoft CFO, called the PC market "challenged" Thursday during the company's earnings call with Wall Street analysts. "In addition to a tough economic environment and competitive pressures, OEMs drew down their Windows 7 inventory as they began the transition to Windows 8," Klein said.
Only in the quarter's final month did Windows sales tick up, but those were to computer makers buying Windows 8, and thus were deferred until next quarter.
Microsoft executives did even not bother citing PC sales statistics Thursday, as they usually do, perhaps because they were so depressing.
"We saw the overall PC market decline this quarter in advance [of] the launch of Windows 8 and in part due to competitive pressures and the challenging macroeconomic climate," Bill Koefoed, the general manager of Microsoft's investor relations, said in the earnings call yesterday, without naming numbers.
According to Gartner and IDC, global PC sales were down 8.3% to 8.6% in the third quarter.
The portion of Microsoft's total revenue of $16 billion generated by Windows was just 20.3%, the lowest in the last four years, and slightly below the earlier low record set in the third quarter of 2009, the period immediately before the launch of Windows 7.
A year ago, Windows accounted for 28% of Microsoft's revenue. The four-year high was 36.3% in the fourth quarter of 2009, the first three-month stretch of Windows 7 sales.
The one bright spot, said Microsoft, was that the third-quarter sales of Windows 8 to OEMs -- $783 million -- were up 40% over the same quarter just prior to the launch of Windows 7.
And Klein continued to press the optimism button about Windows 8. "October 26 only marks the beginning of the journey we will take together with our partners and developers," he said. "Our collective success will be evident over time as we change the way people experience the power of technology."
Microsoft launches Windows 8, its tablet-centric spin-off Windows RT, and the Surface RT, its first attempt at designing and manufacturing a tablet-style PC, next Friday, Oct. 26.
Koefoed also argued that the shift to Windows 8 would divorce Microsoft from its dependence on traditional PC sales, the biggest reason why, as those sales stagnate and even decline, the Windows division has under-performed.
"We have discontinued the bridge to the PC market as Windows 8 will be a platform across a broad set a form factors," Koefoed claimed.
But that shift will be slow, said Alan Krans, an analyst with Technology Business Research.
"High growth from the operating system will not initially be apparent," Krans wrote in a note to clients yesterday. "Success and continued use of prior operating systems, including Windows XP and Windows 7, will cause a delay in initial adoption of Windows 8 in enterprises. Widespread adoption within enterprise customers will likely come within the first two years on the market as Windows 7 matures."
Microsoft's best shot at boosting Windows sales, Krans continued, will be in the consumer market. "Where Microsoft will see the largest near-term growth will be in the consumer space, with mobile device and tablet users being the first to heavily adopt the operating system," Krans said.
The other money-making divisions of Microsoft -- Business, which handles the Office suite, and Server and Tools -- again beat Windows in sales last quarter.
The Business group generated $5.5 billion, while Server and Tools did $4.6 billion. While the Business group was down 2% -- in part, like Windows, because of $189 million in deferred sales to account for the Office 2013 upgrade program that kicked off today -- Server & Tools was up 8% year-over-year.
The Business division accounted for 34.4% of all revenue; Server and Tools produced 28.4%.
Windows' sales last quarter dropped to four-year low as a percentage of Microsoft revenue. (Data: Microsoft.)
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 email@example.com.
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