Microsoft Q3 profit hit as PC sales fizzle

Reuters, SEATTLE

Sat, Oct 20, 2012 - Page 15

Microsoft Corp’s quarterly profit fell a greater-than-expected 22 percent, as sales of computers running its Windows operating system dipped and some revenue was deferred ahead of an upcoming releases of its core Windows and Office products.

The sharp decline surprised investors, who had underestimated the effect of weak personal computer sales, sending Microsoft’s shares down 1.3 percent in after-hours trading.

“To us, it seems like the macro[economic] conditions certainly deteriorated and no tech company will be immune to it,” said Trip Chowdhry, an analyst at Global Equities Research.

Earlier on Thursday, Google Inc had reported sharply lower profits following downbeat reports from Intel Corp and International Business Machines Corp earlier in the week.

Sales of PCs are expected to fall this year for the first time since 2001, according to research firm IHS, due to the weak economy and the inability of the latest crop of lightweight laptops to compete with Apple Inc’s iPad.

Microsoft is betting the release of touch-friendly Windows 8 will rev up sales of PCs, laptops and Windows-compatible tablets as soon as it launches next week and break Microsoft’s heavy reliance on PC sales for profit.

“I don’t control the macro-environment, but there’s a huge opportunity in the explosion of devices,” Microsoft chief financial officer Peter Klein said in an interview. “There’s demand for compelling devices and a connected set of cloud experiences. That’s what Windows 8 is all about.”

Microsoft, the world’s largest software company, said fiscal first-quarter profit fell to US$4.47 billion, or earnings per share (EPS) of US$0.53, from US$5.74 billion, or an EPS of US$0.68, in the previous year.

Wall Street had expected an EPS of US$0.56, according to Thomson Reuters I/B/E/S.

Sales fell 8 percent to US$16.01 billion, largely caused by the dip in demand for personal computers running Windows, as consumers held off new purchases in the tight economy or opted to buy a tablet device instead.

The revenue decline was exaggerated by Microsoft’s deferral of about US$1.36 billion in revenue, chiefly from its Windows unit, which it will regain next quarter after Windows 8 is launched.

Analysts, anticipating the dip in PC sales and accounting for the deferred revenue, had called for sales of US$16.4 billion.

On the positive side for Microsoft, its fast-growing server and tools business — whose datacenter “cloud” services are in high demand — posted a 12 percent jump in operating profits to US$1.75 billion, while its perennially money-losing online services unit — containing the Bing search engine and the MSN portal — narrowed its quarterly operating loss by 29 percent to US$364 million as it increased its share of the search ad market and cut costs.

“Investors were not expecting a home run. All expectations are on the launch of Windows 8 and the entrance into the tablet market,” said Daniel Ives, an analyst at FBR Capital Markets. “In light of the environment, the macro[economic] and PC situation, these are respectable numbers.”