Microsoft gets unexpected bump in Windows revenue

But OS sales gain can't stop More Personal Computing group's third straight decline

Microsoft yesterday said revenue during the December quarter for its More Personal Computing (MPC) group, which includes Windows and the Surface hardware portfolio, was down 5% -- the third straight quarter of year-over-year declines and the sixth shrinkage in the last seven earnings periods.

But Windows revenue was up 3% to approximately $5.1 billion, or about 43% of the group's total.

"This quarter, we saw growth across Windows broadly," said CEO Satya Nadella in a Thursday call with Wall Street.

The part of Windows revenue generated by sales of licenses to device makers -- the bulk of OS income -- was up 5%, a turn-about from the previous quarter when operating system sales were flat, and an even larger climb from a 5% contraction of a year ago.

Amy Hood, Microsoft's CFO, delved into the details. "Our OEM business grew 5% this quarter," she said, referring to license sales to original equipment manufacturers like Lenovo, Hewlett-Packard, Dell and others. The two buckets in total OEM sales -- "pro" and "non-pro," with the latter a synonym for "consumer" -- increased by 6% and 5%, respectively. In the year-ago quarter, the two had declined by 6% and 3%.

Hood also cited growth in the commercial and cloud-based components of Windows' revenue; those categories covered corporate payments for Software Assurance, the annuity-like program that gives businesses upgrade rights, and for subscriptions to Windows 10 Enterprise.

She said that the pro segment of OEM sales grew "better than we anticipated," and credited an "improving commercial PC market and enterprise demand for Windows 10." The OEM sales gain beat the personal computer industry's average. Research firm IDC, for example, pegged global PC shipments during the December quarter at 70.2 million, down 1.5% from the year prior.

Both Nadella and Hood called out growth in sales of premium PCs -- the higher-priced, often specialized systems -- as one of the reasons for the better-than-industry numbers for Windows OEM revenue.

Windows' gains did catch Microsoft by surprise. Three months ago, when Hood laid out the company's expectations for the December quarter, she saw no near-term recovery in Windows' fortunes. "We expect our OEM business and the underlying PC market to be closely aligned," Hood predicted in October.

Although Windows revenue grew, its contribution wasn't enough to stymie a decline in the MPC group.

MPC, one of Microsoft's three product-based financial reporting segments, booked revenue of $11.8 billion, down 5% from last year's $12.5 billion. As in the past, most of the blame was laid on Microsoft's nearly-dead phone business, which tanked in the December quarter, falling 81%, or $878 million, compared to the same period in 2015.

The Surface line, now Microsoft's biggest money maker in MPC's device subgroup, was down 2% from the final quarter of 2015. While the fourth quarter has historically been big for Surface, Microsoft had no new models to pitch in 2016 other than the high-priced, in-short-supply Surface Studio.

On the plus side, abandoning the smartphone market and phasing out sales of the less lucrative Surface Pro 3 boosted the MPC operating income, a measure of profit. For the December quarter, MPC's operating income was $2.5 billion, an explosive 33% gain over the same quarter in 2015.

December's operating system growth was the second straight quarter of double-digit increase, coming after the September quarter's 26%. That period's operating system boost was also attributed to the demise of Microsoft's low-margin phone business.

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The More Personal Computing division's revenue slid 5% in the December quarter, but operating income -- a measure of profit -- jumped by 33%. Microsoft credited the operating income increase to the decision to dump smartphones.

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