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Microsoft yesterday announced their second quarter financial results. The results of most of their operating segments were positive with the exception of Devices and Consumer Licensing segment. D&C Licensing revenue decreased $1.4 billion or 25%, mainly due to a decline in Windows Phone revenue, as well as lower revenue from licenses of Windows OEM and Office Consumer. As expected, the revenue from Windows and Office is declining as consumers are moving towards mobile first world in which Apple and Google are dominating the market. Another reason for the decline in revenue is the increasing mix of lower-end Windows devices which comes under OEM non-Pro category. Also, people buying traditional Office suites are declining since Microsoft is actively promoting the sales of Office 365 subscription service.
Windows Phone revenue decreased $635 million or 61%, primarily due to prior year revenue associated with joint strategic initiatives with Nokia that ended in conjunction with the acquisition of NDS. Windows OEM revenue declined $455 million or 13%, due to a 13% decrease in both OEM Pro revenue and OEM non-Pro revenue. Windows OEM Pro revenue decreased, primarily due to benefits realized from the expiration of support for Windows XP in the prior year and an increased mix of lower-priced licenses for devices sold to academic customers. Windows OEM non-Pro revenue declined, mainly due to an increased mix of opening price point devices sold. Office Consumer revenue declined $208 million or 25%, reflecting the shift of customers to Office 365 Consumer, and declines in the Japan PC market, where Office has high attach to PCs.
D&C Licensing gross margin decreased $1.1 billion or 22%, primarily due to the decline in revenue, offset in part by a $272 million or 48% decrease in cost of revenue. D&C Licensing cost of revenue decreased, mainly due to a $224 million decline in traffic acquisition costs, primarily driven by prior year costs associated with our joint strategic initiatives with Nokia.
In the near term, I don’t see any signs of increase in Windows and Office revenue as Microsoft is moving away from their tradition licensing business. In the case of low-cost Windows devices, Microsoft offers Windows for free, but it brings in revenue through monetization of various Microsoft services such as Office 365, Windows Store, Skype, OneDrive and others.
What do you think of this transition plan from Microsoft?