Microsoft Enterprise Sales Fizzle

Microsoft's quarterly earnings, released Thursday, indicate the battered PC market is on the path to recovery. But the report also shows the business IT sector could trail the consumer market in terms of strength and timing of a rebound.

Sales of Microsoft's Windows operating system jumped 70% year-over-year, to $6.9 billion in Microsoft's fiscal second quarter, primarily on the strength of Windows 7's retail debut last October.

"This is a record quarter for Windows units," said chief operating officer Kevin Turner. "We are thrilled by the consumer reception to Windows 7," said Turner.

Microsoft said Windows sales also were boosted by double-digit growth in PC sales during the quarter, which covered the key, holiday shopping season. The company said worldwide PC shipments grew 15% to 17% during the period.

Windows sales attributed to Microsoft's PC-making "OEM" partners, including Dell, Hewlett-Packard, and Lenovo, jumped 21%. OEMs account for about 80% of Microsoft's total Windows sales. Microsoft added that OEMs were able to reduce inflated inventories in the quarter.

But Microsoft cautioned that Windows client sales to the corporate market were weaker than in the consumer sector, though it did not provide a specific breakout. Turner said businesses are showing "enthusiasm to adopt" Windows 7, but it's too early to gauge how many will upgrade from Windows XP, and when. Windows Vista, Windows 7's predecessor, was shunned by enterprises due to concerns about cost and compatibility.

Meanwhile, Microsoft's sales of server software that runs corporate datacenters grew just 2% during the second quarter, to $3.8 billion.

Many corporate IT buyers may be holding off upgrading their servers until Microsoft releases SQL Server 2008 R2. The software is expected to ship in May. SQL Server 2008 R2 promises, among other things, enhanced business intelligence capabilities and scalability, according to Microsoft. But upgrades can be tricky and expensive operations for corporate IT departments.

Microsoft also saw a decline in sales of its Office productivity suite. Revenue from the unit was down 3%, to $4.7 billion, mostly due to weaker performance in the commercial market. Business sales were down 6%, even as consumer sales increased 12%.

Overall, Microsoft's Q2 revenues rose 14% compared to the same period a year ago, to $19.02 billion. Net income jumped 60% to $6.6 billion, while earnings per share climbed 57%, to 74 cents. Wall Street analysts polled by Thomson Reuters were, on average, expecting EPS of 59 cents.

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