third-quarter profits were up 19% relative to the same period last year. The uptick beat analyst expectations and was propelled not only by lower-than-anticipated expenses but also strong server and Office sales. At face value, the numbers seem like a solid rebuttal from Microsoft to its critics; the company, already burdened with Windows 8's cool reception, has been a media punching bag over the last few weeks, with blows ranging from the PC's continued decline to Goldman Sachs downgrading Microsoft's stock.
The earnings report shows that Microsoft is a strong and diverse company, but it doesn't fully silence doubts. Windows 8 and the scope of Microsoft's influence are two of the open questions. What does Redmond's financial health mean for the future of personal computing?
As a whole, Microsoft's Windows division rose 23% to $5.7 billion, slightly below analyst projections. Given how much criticism Windows 8 has absorbed, that might seem like a vindicating number. This isn't the case.
Microsoft predictably declined to break down Windows revenue. It didn't explore how Windows 7 sold relative to Windows 8, for example. Surface sales were likewise unaddressed. Even so, there are many reasons to doubt that Windows 8 has performed well.
For one thing, the seemingly healthy numbers include deferred revenue from previous quarters. When this sum is removed, Windows earnings were essentially flat. There's also evidence that Windows 8 has struggled to gain market share, suggesting that even within the adjusted earnings, Microsoft's newest OS was not a strong performer.
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In an email, Gartner analyst Carolina Milanesi said she suspects "most of the revenue comes from software upgrades." Indeed, with PC sales down, it's unlikely that Windows revenue is coming from new machines. But Windows XP will lose support next year, and scores of businesses are still in the process of upgrading. Most of them have opted for Windows 7, resulting in the Windows division posting a strong quarter, even as its newest offering continues to flounder.
Though Windows 8 might not have been a standout performer in Q3, Gartner analyst David Cearley believes the OS can still turn things around. In an interview, he stated that whereas Windows 7 was a refined product, Windows 8 has "rough edges." He lauded Microsoft's bold moves, such as kernel-level unity across its various Windows platforms, but predicted Redmond will need one or two update cycles to add polish.
Indeed, with Windows Blue, a Win8 update expected later this year, Microsoft is accelerating its update schedule, demonstrating the urgent pace necessary to improve its products. The strategy makes sense but it remains to be seen whether Redmond implements the features users want, or if it simply offers uninspiring updates more regularly. Recently rumored tweaks include resurrecting the Start button, a move that would address one of Win8's most persistent UI complaints. It's a good start -- but how much more will Windows Blue need to effectively woo consumers?
Microsoft CFO Peter Klein, who announced alongside the earnings that he will step down as the end of this quarter, said Thursday that "small" touch-enabled Windows devices will arrive in coming months, a near-confirmation that 7-inch tablets, much-rumored in recent months, will soon join the Redmond stable.
Klein also revealed that the devices will have competitive price points, a key factor that could not only stimulate Windows 8 adoption but also cut into the iPad Mini's dominance of the mini-tablet market.
Still, many questions remain. What does "competitive" mean? And will these devices run Windows 8 or Windows RT? Intel's Bay Trail Atom processer will allegedly bring tablet form factors and battery life to devices that can run the full OS. If the cheapest models are RT-only, will consumers care? Windows Blue will have some say in this, and Microsoft could make up lost ground by targeting this budget-friendly market segment. Still, until the devices are in users' hands, it will remain difficult to handicap Redmond's chances.