Exclusive: Microsoft Altered Windows Sales Numbers

Internal bookkeeping change handed $259 million in additional revenue to Redmond's OS unit.

By Paul McDougall, InformationWeek
Nov. 12, 2010

Microsoft's most recent Windows sales totals got a boost from the fact the company quietly added revenues previously assigned to other groups to its operating systems unit, a bit of accounting legerdemain that, along with other bookkeeping moves, helped the Windows group post big gains in the past quarter, according to an InformationWeek analysis of the software maker's SEC filings.

Microsoft's latest quarterly report shows the company bolstered revenues in its Windows, Server & Tools, and Office units in part by shifting money from other internal organizations--mostly the Entertainment and Devices Division, which sells the Xbox.

A Microsoft spokesperson denied any financial shenanigans, but would provide few other details.

Windows group sales alone may have benefited by as much as $259 million or more, just from the bookkeeping changes. Indeed, the Windows group, which includes the flagship Windows 7 OS, was the main beneficiary of the revisions, while the EDD unit was the biggest loser.

Microsoft's internal wealth redistribution is evident when the Q1 fiscal year 2011 report (which covers the calendar period from July 1 through Sept. 30, 2010) Microsoft filed with the SEC on Oct. 28, is compared to Microsoft's Q1 report for fiscal year 2010, which it filed Oct. 23, 2009.

The comparison shows that, in the more recent document, Microsoft added $259 million to its original tabulation of Windows group revenues for Q1 FY 2010-increasing the total by 6.5%, to $4.24 billion as opposed to the originally stated $3.98 billion.

Microsoft also added $114 million to the Q1 FY 2010 numbers originally stated for its Server & Tools unit, and it added $111 million to its Business Division, which is responsible for Office sales. EDD revenues for
Q1 FY 2010, as revised, were $1.41 billion, down 25% compared to the $1.89 billion Microsoft first reported.

Microsoft did not restate total revenues for Q1 of fiscal 2010, which came in at $12.92 billion, nor is there anything to suggest the company's revisions violate any accounting rules.

A Microsoft spokesperson said the adjustments, also reflected in the most recent quarterly results, were related to an organizational shakeup, announced earlier this year, that saw the departure of longtime EDD chief Robbie Bach. The spokesperson said some of the changes were the result of embedded systems products being moved from EDD to Server & Tools and Mac Office's move from EDD to the Business unit after Bach left.

But the spokesperson declined to reveal how Microsoft's Windows unit gained
$259 million in Q1 FY 2010 revenues from the shakeup. Microsoft's Windows group revenues for the past quarter would have been closer to $4.4 billion under its old system of tabulating sales, not the $4.7 billion actually reported, assuming sales from products added to the Windows group at least held steady year-over-year. There's one clue as to where at least some of the Windows unit's gains came from. Microsoft previously allocated revenues from sales of its Surface interactive display kiosks to the EDD group.

But in the most recent 10Q, Surface is absent from the list of contributors to EDD revenues. In fact, Surface has vanished from Microsoft's quarterly earnings statement altogether.

Whether Surface sales were enough to account for $259 million in extra revenues had they been added to Windows is hard to say, since Microsoft never broke them out. When asked specifically, Microsoft's spokesperson declined to say which unit, if any, has absorbed Surface.

The revenues added to the Windows group are more noteworthy when seen in concert with one other significant accounting move Microsoft undertook in the past year.

The company deferred $1.5 billion in Windows sales revenue in Q1 FY 2010 as a result of an upgrade program. The program let consumers who purchased a Vista PC during that quarter move to Windows 7 for free when Windows 7 became available in October of calendar 2009.

Eliminating the effects of the deferral plan and Microsoft's internal reorganization shows that the Windows group's year-over-year sales increase in the most recent quarter was nowhere near the 66% Microsoft reported last month.

By Microsoft's own admission in its 10Q filing of Oct. 28, Windows sales from the OEM channel, which account for 75% of all Windows sales, increased just 11% year-over-year when the deferral program is considered. Not bad, but it's pretty much in line with most estimates for overall PC market growth during the period, including Microsoft's own.

To boot, data from market watcher Net Applications shows Windows has actually lost more than 1% of market share since last December, though it still commands more than 91% of the PC OS market.

The bottom line: Microsoft's Windows business remains healthy, but it's not the high double-digit growth engine the company's numbers-barring a deeper examination--would seem to indicate at first glance.

And what happened to Surface?

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