By "hardware," Sherlund means Microsoft's branded tablets, the Surface Pro and Surface RT, which, though widely reported to not have sold as well as Microsoft had expected, contributed to the division's revenue.
The problem is, the profit margin on the hardware is lower than for software, Sherlund said.
Microsoft has remained silent on how many Surface units it has sold.
It also hasn't updated sales figures for Windows 8 since the beginning of the year, when it said it had sold 60 million Windows 8 licenses, on par with how Windows 7 was doing at this point in its life cycle.
In its news release on the declining PC shipments, IDC placed a large part of the blame squarely on Windows 8, saying "the radical changes to the user interface, removal of the familiar Start button, and the costs associated with touch have made PCs a less attractive alternative to dedicated tablets and other competitive devices."
TABLET MARKET TOUGH
Sherlund acknowledges that Microsoft has had a hard time breaking into the tablet market, but he thinks the company has another chance later this year when Intel releases a new line of processors, dubbed Haswell, which promises longer battery life. He also expects better sales as more manufacturers release cheaper and more forms of convertible ultrabook-tablet devices.
Initially, people will buy those ultrabooks - ultrathin and lightweight laptops - for use as notebooks, he said. "But over time, they'll begin to use more and more touch, and as more content is available through the touch capabilities, people will begin to use it more as a tablet."
But the risk, he said, is that even after Haswell ships, people don't buy ultrabooks, and instead turn to cheap Chromebooks, just as they're already turning to tablets.
"What's at stake here is a lot of high-margin businesses," said Sherlund, who added that he thinks it's important for Microsoft to get Office onto Android and iOS devices. "The company's on the slippery slope of declining PC sales. It's critical that Microsoft take advantage of multiple platforms and not just Windows."
Another move that may help Microsoft is "Blue," the internal code name for a wave of updates expected this year for Microsoft products such as Windows and Windows Phone.
Microsoft has not said much officially about Blue, aside from a blog post from corporate communications head Frank Shaw, who wrote: "Product leaders across Microsoft are working together on plans to advance our devices and services, a set of plans referred to internally as 'Blue.' "
But rumors have abounded, including that Windows Blue will see the return of the Start button familiar to users since Windows 95 - though it's unclear whether that button will bring up the traditional Start menu or whether the button will merely exist as a way of getting back to Window 8's square-tiled Start screen. The other persistent rumour is that Windows 8 users will have the option to boot directly to desktop, bypassing the tile-screen interface altogether.
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