Microsoft’s Windows disappoints on lukewarm PC sales4 min read . Updated: 28 Jan 2011, 10:08 AM IST
Microsoft’s Windows disappoints on lukewarm PC sales
Microsoft’s Windows disappoints on lukewarm PC sales
Seattle: Sales of Microsoft Corp’s Windows software fell short of outsized expectations, rekindling fears that the spread of mobile gadgets will erode its main PC-focused business.
Microsoft surprised Wall Street with a better-than-expected profit, helped by resurgent corporate spending after the belt-tightening of past years. But its shares stayed flat as investors expressed concern about the weakness of overall computer sales amid a faltering US recovery.
The world’s largest software maker, whose Windows operating system runs on 90% of the world’s computers, is heavily dependent on PC sales, which grew only 3% in the quarter. Now it is starting to feel the heat from investors eyeing the phenomenal take-up of Apple Inc’s iPad.
“Outstanding numbers when you take a first look at it, but when you delve into them, Windows missed expectations by $300 million," said Brendan Barnicle, analyst at Pacific Crest Securities.
Sales of smartphones and tablets are expected to grow much more quickly than PCs over the next few years, posing a threat to Microsoft’s key market.
With the migration to mobile devices from desktop computers expected to accelerate, Apple overtook Microsoft to become the largest US technology company by market value last May.
But some analysts argued that fears of tablets and other hot-selling gadgets replacing PCs were overblown—at least for now.
“We’ve gotten over 300 million Windows 7 licenses sold. I mean, PCs are not disappearing. Put that into perspective with 7 million tablets sold last quarter from Apple," said BGC Financial’s Colin Gillis.
“Clearly there are disruptions in the landscape, but some of the negative viewpoints are overblown."
Microsoft stock is down about 3% over the past 12 months, compared with a 24% gain for the tech-heavy Nasdaq. Apple shares are up 65% over the same period.
The results surprised the market after being discovered online by data search firm Selerity, which posted profit and revenue numbers on Twitter at 2:50 p.m. EST (1950 GMT).
Trading in Microsoft’s shares spiked just under an hour later, after blogs and news agencies started reporting the earnings from the web page discovered by Selerity, sending the shares up as much as 2% to $29.46. They ebbed back to $28.87 at the close, a 0.3% gain for the day. They drifted slightly lower in after-hours trading.
“A preproduction draft of our earnings release was discovered by one or more media sources who then published our results to the web before market close," said a Microsoft spokesman, who apologized for any confusion and said the company was reviewing procedures to make sure it does not happen again.
Windows Falls Short
Though Microsoft faces longer-term challenges in the PC arena, its other core product, its suite of Office applications, generates strong cash flow.
Sales at its Office unit rose 24% to $6 billion, indicating that US businesses are starting to spend more on technology after the recession.
But consumers are proving less resilient. US initial jobless claims surged in the latest week to their highest since October, indicating that any recovery in consumer spending will come only in fits and starts.
Sales for its Windows unit fell 30% to $5.054 billion, a little short of analysts’ expectations of about $5.3 billion, due to the lukewarm growth in PC sales. The year-ago figure was swollen by $1.71 billion in deferred revenue and pre-sales from the launch of Windows 7.
The perennially money-losing online services division, home of the Bing search engine, posted a 19% increase in sales, but saw its loss widen 17% to $543 million. The unit, which is making only slight headway against Google Inc, has lost more than $6 billion in the last five years.
Unearned revenue—a measure of the strength of the business in Microsoft’s pipeline—fell 9.5% to $13.4 billion, a cause of concern to some investors.
Kinect Best Hope?
Microsoft reported overall fiscal second-quarter profit of $6.63 billion, or 77 cents per share, compared with $6.66 billion, or 74 cents per share, a year earlier. The per share figure was higher due to a reduction in shares outstanding from last year.
Wall Street was expecting 68 cents per share profit, according to Thomson Reuters I/B/E/S.
Sales rose 5% to $19.95 billion, helped by strong sales of its Kinect hands-free gaming system and Xbox consoles, handily beating analysts’ average estimate of $19.15 billion.
“Kinect represents the most legitimate opportunity we have seen for the Xbox to drive some profit. I do think there is a meaningful catalyst there," said Motley Fool senior analyst Tim Beyers. “The Windows phone looks good. I do think that Windows Phone 7 is proving to be an interesting alternative to the Blackberry.
“I guess the nut of it is, Microsoft is starting to do something better and they are not tripping on themselves, and that counts for something."
Microsoft now has $41.2 billion in cash and short-term investments on its balance sheet. Chief financial officer Peter Klein said he was happy with the cash it is distributing to shareholders, holding out little hope of a dividend hike, which some investors would like to see.