It's a 10% revenue bump! Well, no, actually ...
Microsoft posted its Q4 financials, and for those of you wondering if it has enough cash in its pocket to buy lunch, the answer is yes. Revenue grew to $19.896 billion, representing a 10% increase over 2012, but there's a catch; not all of that revenue is real growth. Most of it relates to one-off special events - a deferral of cash earned in 2012 associated with the Windows Upgrade Offer, and a chunk of change that came with the Office Upgrade Offer - which means that, of that 10%, only 3% ($515 million) represents actual honest-to-Wall Street growth in its markets. As you might expect, its office and business segments were the ones bringing home the bacon, but entertainment did modestly well. Even including a slowing Xbox 360 market - wouldn't you know it, in the year Microsoft announced a new console, people stopped buying the old one - the entertainment division's revenue increased by 8% ($134 million), due mainly to higher Windows Phone earnings.
Problem being, for all that revenue growth, costs are also going up. Cost of revenue went up 35%, to $1.4 billion, mostly on account of Surface and Windows 8. Online infrastructure expenses and payroll issues were a large part of that 35%. Advertising for Windows 8 and Surface didn't do Microsoft any favors either, and pushed operating expenses up. But one of the biggest clouds - no, not that Cloud - on the horizon is the decline in the PC market, which is still hitting Microsoft hard. Its online services - Skype, Xbox LIVE and Office, as well as services provided by the other Cloud - are doing well, and offsetting, at least in part, the lack of hardware sales. "The growing adoption of our cloud services, including Office 365, Windows Azure and Dynamics CRM, continues to demonstrate our leadership position in the cloud," says COO Kevin Turner.
But here's the thing. Microsoft has already spent a mint on the Xbox One, and may or may not be charging too much for it at launch. There's already been loose talk about selling off the entertainment division. "Xbox is one of the areas of success for Microsoft and is cool to consumers," said analyst Rick Sherlund at the time, "but it is perhaps time to assess whether this can ever be material to the overall company and might be more leveragable to a consumer-oriented company such as Samsung." Now we have financials that say phone games are doing better than Xbox sales, and we're looking forward to a Christmas where Sony might carve up market share like a juicy turkey. Christmas had better be good for the Xbone; the entertainment division doesn't need a financial black eye right now.