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Microsoft Earnings Show Enterprise Strength, Consumer Weakness

Microsoft Q3 earnings report reveals strong growth in business market but anemic gadget sales. Is it time for Redmond to jettison its consumer offerings?

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Microsoft's relevance in the consumer tech market is fading as shoppers opt for iPads and Android phones to access apps and keep in touch. But Redmond's latest quarterly numbers, released Thursday, show that it's as strong as ever in the enterprise, and getting stronger.

That fact might give CEO Steve Ballmer and his team pause to consider whether Microsoft should stop trying to be all things to all markets, and instead develop an enterprise-only strategy that leverages its strengths in the data center and front office--and doesn't throw good money after bad chasing markets it's already lost.

Redmond's fiscal third-quarter results were a tale of two Microsofts. There was the consumer company, which is clearly getting pounded by Apple and Google in areas ranging from mobile devices to search, and there was the IT company, which blew away analysts' forecast on the way to a stellar performance.

First, the basic numbers. Total Q3 revenues were up 6% year-over-year, to $17.4 billion, while net income was off 2.4%, to $5.1 billion. EPS fell 1.6%, to 60 cents. Those numbers beat the Street's forecasts.

Now dive deeper. Looking at the numbers for Consumer Microsoft is difficult because in many cases the results were so lackluster Redmond didn't bother to mention them. Take Windows Phone (insert Henny Youngman joke here). Microsoft's report did not divulge how many devices were sold, so it's fair to assume the number was relatively miniscule.

[ Considering a Windows 8 ARM tablet? Here's what you need to know now: Windows 8 ARM Tablets: 8 Must-Know Facts. ]

But it's clear that Microsoft is losing millions of dollars trying to convince consumers to buy a phone they don't want. The company's Entertainment and Devices group, home to Windows Phone, went from earning $210 million in Q3 last year to losing $229 million this year. Hey, hiring Nicki Minaj to pitch your product in Times Square doesn't come cheap. Despite all that money and effort, Windows Phone's market share is less than 4% and shrinking, according to Comscore.

That doesn't bode well for Windows 8 tablets, which borrow Windows Phone's Metro interface.

Windows-based consumer PCs aren't doing much better. This is where Microsoft's numbers get tricky. The company said worldwide PC sales grew 2% to 4% over the past year, with business PC sales up 8%, and consumer PC sales up 6%. Doesn't add up, right? That's because Microsoft's consumer numbers don't include netbooks. If business sales were up 8% and consumer sales up 6%, then netbook sales must have cratered for the overall market to be up just 2% to 4%.

Microsoft's Online Services unit, basically Bing, didn't fare much better. Revenue was up 6%, and the group narrowed its losses from last year, but it still managed to post a $479 million operating loss.

Now the good news, of which there was no shortage--but it's virtually all on the enterprise side. I already mentioned that business PC sales were up 8%, pulling up OS sales with them. Windows revenue was up 4% overall, and the Windows group posted a 6% rise in operating income, to $2.95 billion. Most of the gain came from business sales.

"Our business desktop offerings remain a top priority for CIOs," said Microsoft CFO Peter Klein, on a conference call Thursday with analysts. "This quarter, businesses continued to refresh their hardware. As a result, we saw healthy growth in business PCs around the world."

Microsoft Office followed a similar trend. Sales to consumers were up just 2%, but one-off sales to businesses were up 5%, and multi-year licensing sales were up a very healthy 13%. "As they purchase new PCs, businesses are also deploying Office 2010 to increase productivity and manageability while reducing their total cost of ownership," said Klein.

Microsoft's other business software, particularly cloud products, did equally well or better. Lync revenue was up more than 30%, as was revenue from Dynamics CRM, of which there are now more than 225 million individual users at more than 33,000 customer sites.

On the server and data center side, things are also booming. SQL server sales grew "in the high teens," Klein said, while revenue from SQL Server Premium was up more than 30%. Multi-year licensing deals for server software grew more than 15%, and enterprise services revenue grew 20%.

The numbers don't lie. Clearly, many CIOs are buying Microsoft's pitch that it's the only vendor that can provide an integrated stack of business software that runs from productivity and collaboration offerings at the front end, through the data center, and up into the public cloud. It's equally clear that shoppers just aren't buying what Microsoft is offering on the consumer side.

So as not to put at risk from distractions and money-losing propositions their clearly thriving commercial business, it might be time for Ballmer and company to double down on the enterprise--and leave the gadgets to Google and Apple.

As companies increase their use of cloud-based applications, IT and security professionals must make some tough and far-reaching decisions about how to provision, deprovision, and otherwise manage user access. This Dark Reading report, How To Manage Identity In The Public Cloud, examines the options and provides recommendations for determining which one is right for your organization. (Free registration required.)

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