Buisniess Microsoft Windows Hangs Tough in Face of Falling PC Shipments

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 Flat revenue growth ordinarily doesn't get much attention on Wall Street, but in the case of Microsoft Corp.'s (MSFT) Windows division it may be something to pay attention too, say analysts.

Global PC shipments fell 14% in the first quarter, according to research firm IDC, their steepest decline ever. As the leading operating system used on PCs, many analysts expected Windows revenue to follow a similar path in its fiscal third quarter. Microsoft reported that after adjustments third quarter Windows revenue was flat at $5.7 billion.

Windows revenue met analysts' expectations, which was a leading reason Microsoft shares rose 2.6% to $29.55 in after-hours trading.

"All eyes are on the Windows business," said analyst Gregg Moskowitz of Cowen & Co. "It's critical the Windows business hold in close to what the street is expecting."

Microsoft is engaged in a multiyear effort to recalibrate Windows from an operating system for desktop and laptop computers into something that will power tablets and smartphones as well. Microsoft is striving to catch up with the mobility of Apple Inc.'s (AAPL) iPad and devices running Google Inc.'s (GOOG) Android operating system, but it doesn't want to abandon those legacy customers in the process.

"The transition is complicated given the size of the hardware and software ecosystems," Peter Klein, chief financial officer said on the earnings call.

Microsoft's Surface tablet computer introduced last October could be helping. Surface sales are included in Windows revenue, but not broken out. The same goes for the benefit of multiyear license revenue. While it isn't clear what benefit those things had, the fact that revenue for the Windows division was flat during a quarter when PC shipments slid "shows the strategy is working to offset the PC numbers," said analyst Brent Thill of UBS.

To further propel Windows revenue, Microsoft is working with manufacturers to introduce smaller, lower cost Windows 8 devices, but price alone isn't the key to consumer success, said Mr. Klein.

"It's not just the devices. It's the chips, it's the apps, it's the buying experience and the user interface. We're really focused on all five of those things," said Mr. Klein.

As more people abandon the desktop for mobile, Microsoft also is working to build services that can still drive revenue, he said. The online version of its Office software, Office 365, has grown to a $1 billion annual business and its consumer version of Office 365 has enjoye
d "strong adoption" since it was introduced early this year, he said. Users of its Xbox Live gaming and home entertainment service grew 18% in the past year to 46 million