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Office 365 subscriptions furnish 4% of Microsoft's Office division revenue

Gregg Keizer | April 23, 2013
Company bullish on rent-not-buy strategy's furture as it touts $1B annual income

Nor does the $1 billion annual revenue from Office 365 account for a significant portion of MBD sales.

Over the last four quarters -- from April 1, 2012 to March 31, 2013 -- MBD revenue was $23.8 billion. Using that number, $1 billion from Office 365 would represent 4.2% of the total.

Still, Klein highlighted Microsoft's hopes for Office 365, even as he warned Wall Street analysts it would impact revenue in the short term.

"We expect to grow our customer base, increase customer satisfaction via continuous updates, and reduce piracy," said Klein, who added that as time goes on, Microsoft's costs for supporting the subscription services would decline. "We expect our transactional customers to increasingly transition to the cloud with Office 365."

However, that will affect the bottom line, at least in the short term, he acknowledged.

Rather than book the revenue when the subscription is sold -- as it currently does with perpetual licenses -- Microsoft will defer part of the revenue until successive quarters.

"In the short term, you'll be deferring revenues that were not in a subscription, and would have been recognized immediately," Klein told the analysts. "And as the subscription business is growing, you'll see that impact growing, but over time, what you'll get is what looks like an annuity revenue stream that's more predictable."

In other words, if perpetual-license customers switch to Office 365, per-quarter revenue will decline. Total revenue over the life of a subscription will increase, Klein said, driven by "higher customer satisfaction and probably higher retention rates going forward."

But MBD revenue is still tied to Windows, and in some cases, to PC sales.

Microsoft has thus far declined to offer Office for non-Windows tablets, which make up the vast bulk of the market. Some analysts have criticized the company for what they see as a short-sighted strategy to use Office to promote sales of Windows tablets, PC-to-tablet convertible devices and hybrids, such as the Surface Pro.

Microsoft did not mention any plan to bring Office to competing mobile operating systems such as Apple's iOS and Google's Android.

Office sales to consumers and small businesses, who purchase Office on a per-copy basis -- Microsoft calls that "transactional" -- were down last quarter, Microsoft said, because of the decline in PC sales. IDC pegged the contraction at 14% year-over-year, while rival research firm Gartner said it was a slightly-less-severe 11% drop.

For the first quarter, Office revenue derived from consumers was "roughly in line with the consumer PC market," said Suh, meaning that it was down by double digits from the year before.

The same is expected this quarter, Klein added. "Transactional revenue, which is the remaining 40% of the division total, should be in line with the x86 PC market," he said, referring to the quarter that ends June 30, also the end of Microsoft's fiscal year 2013.


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