Microsoft Q2 net slips 0.2% as Windows sales fall
Microsoft Corp.'s second-quarter profit was flat compared with a year earlier, but was two cents ahead of analysts' expectations, as strong sales of its Office suite of programs and Xbox gaming system offset weakness in the flagship Windows operating system.
Revenue from the business division grew 2.7% to $6.3 billion due to strong demand for the company's cloud-based Office 365 suite of office utilities and collaboration tools such as Sharepoint. Microsoft's entertainment operations, which include the top-selling Xbox video game console, rose more than 14.6% to $4.2 billion.
Still, the Redmond, Wash., software giant said its Windows operating system fell short of expectations because of declining PC sales.
Last week, the company warned that flooding in Thailand has disrupted supplies of hard drives used in computers, impacting PC shipments and software demand. Revenue in the Windows unit fell 6.3% to $4.7 billion.
Chief Financial Officer Peter Klein said the company was experiencing a "challenging PC environment," as consumers in Europe were further battered by economic turmoil.
But on the corporate front,"we're seeing enterprises investing steadily in Office and cloud services as well as our server and tools products," said Klein in an interview before the company's earnings call with analysts.
The mixed performance underscores the challenges Microsoft is facing as it navigates the shift in computing from the desktop to mobile devices. The company needs to sustain sales of its mainstay software products as it tries to get customers to move to its cloud services.
The company is also trying to catch up in the mobile space, where it has fallen behind competitors Apple Inc. and Google Inc. It is planning a beta release of a new operating system, dubbed Windows 8, in February that will work on both standard PCs and tablet computers.
In after-hours trading Thursday, Microsoft shares rose 2.8% to $28.93--roughly the same level as a decade ago--as investors digested the results. The company's shares have risen more than 10% over the past month. The Xbox captured 46% of the console market in December.
Despite that popularity, the company said the outlook for the market appeared "softer than we previously expected." For the fiscal third quarter the company expects entertainment revenue to grow in the "high single digits" compared with 15% growth in the second quarter.
The company also expects the shortage of hard disk drives will continue into the third quarter, keeping downward pressure on PC shipments.
The results marked the first time Microsoft reported earnings that incorporated its $8.5 billion acquisition of Internet telephony leader Skype. Microsoft had previously boosted its operating expense projections for the current fiscal year by about $600 million to reflect the addition of the unit's operational expense and acquisition-related expenses.
Expense control is key for the year ahead, Klein said, including sales and marketing expense, which was down 1.6% in the quarter. Microsoft is achieving the savings by integrating marketing of several products into one ad pitch.
The same is true of research and development expense, which the company focused on Windows 8 and its related technologies, he said.
The company estimated that shipments of PCs fell 2% to 4%, with most of the growth in emerging markets, where Microsoft earns less for software. Consumer demand for netbooks continued to weaken, Klein said. Business-PC demand, by comparison, rose 2%.
"We have not seen a change in the business spending environment," said Klein.The internal indicators that Klein watches, such as changes in unearned revenue and license renewals, are trending as he expected.
Revenue in the Server and Tools group, which sells enterprise computing services, rose 11.2% to $4.7 billion in the quarter. Operating income for the group rose even higher, up 16.6% to $1.9 billion.
The change Klein has noticed is the push for value that is leading some enterprise customers to select lower cost cloud solutions over traditional software licenses.
Microsoft enjoyed strong sales of cloud services, both its Azure computing platform and Office 365 suite of desktop software, which move software and data storage onto remote computer servers where devices from PCs to smartphones can access data equally well.
"We've spent a considerable amount of capital expense in the past on our server environment," said Jeff Marshall, chief information officer of ad agency Y&R/Wunderman, who has more than 10,000 agency employees in more than 140 locations using Office 365 rather than in-house systems.
Shifting to the cloud "allows me to focus more of that cap ex on end users and what they need to serve our clients."
For the quarter ended Dec. 31, Microsoft reported earnings of $6.62 billion, down from $6.63 billion. On a per-share basis, earnings rose to 78 cents a share from 77 cents a year earlier as Microsoft had 1.2% fewer shares outstanding in the latest quarter.
Revenue climbed 4.7% to $20.89 billion. Analysts surveyed by Thomson Reuters expected a profit of 76 cents a share on revenue of $20.92 billion. Total operating expenses were up 9.4%.
Microsoft's Windows and Windows Live Division posted a 6.3% decrease in revenue as profit fell 11%. Revenue for the company's servers and tools products, which form the backbone of enterprise networks and private clouds, jumped 11%, as the unit's income improved 17%.
At the business division, which earns most of its sales from Microsoft Office, sales rose 2.8% as profit climbed 1.6%. Sales at the entertainment-and-devices business, which houses the top-selling Xbox video game console--advanced 15%.
In online services, revenue climbed 10%. Microsoft has invested heavily in the unit, launching a splashy advertising blitz last year to promote Bing, which is the second-most-popular search engine in the U.S. behind Google, according to comScore Inc.
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