Microsoft’s Windows business is showing signs of recovery as PC Original Equipment Manufacturers (OEM) find success in commercial and premium consumer PC markets.
Following the vendor’s recent financial results, Microsoft’s overall revenue declined 7.1 per cent year-to-year to $US20.6 billion in 2Q16, and gross profit declined 14.1 percent from 2Q15 to $US12.6 billion.
As reported by ARN, operating profit improved 250 percent year-to-year to $US3.1 billion, but the gain was due entirely to an unfavourable comparison with 2Q15, which absorbed a significant write-down of the Nokia handset business.
Excluding 2Q15, operating profit in 2Q16 was Microsoft’s lowest quarterly operating income in nearly four years, a function of the greater sales, marketing and research and development investments Microsoft made to catch up to rivals in cloud markets.
However, as Technology Business Research observes, declines across these metrics would have been less were it not for the impact of foreign currency exchange rates, and the volume of revenue and profit are clear indicators of Microsoft’s ability to generate handsome margins in competitive markets.
“Microsoft appears to have shed most of the lingering effects of declining Windows licensing revenue that hampered its performance over the last two years,” Technology Business Research Senior Analyst, Jack Narcotta, said.
Narcotta said the maturation of the Windows 10 operating system is helping PC OEMs in commercial markets sell Windows Pro licenses with new PCs more effectively, and a broader range of Windows 10 powered premium 2-in-1 and thin-and-light notebook PCs are garnering the attention of consumers, lifting Windows’ non-Pro license revenues.
“While global PC demand remains weakened, pockets of growth are emerging in these premium consumer and commercial PC segments,” Narcotta explained.
Despite year-to-year revenue growth in its Productivity and Business Processes and Intelligent Cloud Segments showing Microsoft’s footprint in cloud markets is expanding, Narcotta believes Windows remains near the centre of its value proposition to consumers and businesses.
Consequently, OEMs are moving to capitalise on greater demand for commercial notebooks and premium consumer 2-in-1 PCs, focusing on building customer loyalty and brand strength for both the OEMs themselves and Windows that promises to accelerate refreshes of older models and encourage sales of new, higher-priced devices.
“While TBR believes 2Q16 is an incremental step for Windows revenue recovery, it is a step forward nonetheless,” Narcotta said.
In PC markets, Narcotta said the challenges that persisted over the last few years to halt Windows revenue decline are receding as Windows 10 gains momentum in growing markets such as premium notebook PCs and commercial PCs.
“Microsoft’s More Personal Computing segment, of which TBR estimates Windows OEM license revenue accounted for approximately 65 per cent of segment revenue, declined 3.7 percent year-to-year to $US8.9 billion, but plummeting Phone sales were responsible for the majority of the decline,” Narcotta explained.
Meanwhile, Surface PC revenue climbed 8.6 percent year-to-year to $US964 million, which in turn boosted non-Pro and Pro Windows license sales from 2Q15.
For Narcotta, Microsoft’s announcement in early July 2016 that it expects to miss its goal of one billion Windows device users by 2018 illustrates how the company will be challenged to transform short-term momentum from Windows 10 adoption into sustainable growth.
“While Microsoft attributes some of the expected miss to selling its Windows-powered phone business to FIH Mobile, a subsidiary of Taiwan-based contract manufacturer Foxconn, TBR believes slower PC sales forecasted beyond 2017 are also a contributor,” he added.
However, Narcotta believes the end of the year-long trial period on July 29, 2016, for enterprises of Windows 10 - after July 29 enterprises downloading Windows 10 will be charged a subscription fee of $US7 per month, per seat - will help spur Windows license purchases among enterprises.
“This will help fill some of the revenue and profit gap created by fewer PCs shipped, and continuing to shift Windows’ overall product mix to more lucrative Pro licenses,” he added.