Microsoft Misses Q1 Estimates Ahead Of Windows 8

Software leader Microsoft (MSFT) late Thursday joined the parade of companies posting weak results tied to the declining PC market.

Microsoft reported earnings of 53 cents a share, down 22% from the year-ago quarter and 3 cents below Wall Street forecasts, for its fiscal Q1 ended Sept. 30. Sales fell 8% to $16.01 billion, vs. analysts’ target of $16.42 billion. It was the Redmond, Wash.-based company’s first down quarter for profit and sales in the past three years.

Microsoft shares were down more than 1% in after-hours trading following the earnings news release. Shares fell a fraction in the regular session, closing at 29.50.

Microsoft hopes its Surface tablet boosts its December quarter. Getty ImagesMicrosoft hopes its Surface tablet boosts its December quarter. Getty Images View Enlarged Image

Analysts predict Microsoft will return to sales and earnings growth in the December quarter, thanks to fall product launches led by its Windows 8 operating system. Microsoft will launch Windows 8 on Oct. 26, along with a line of Surface tablets. Also on tap this fall are new Office productivity software, Windows Phone 8 software and a sequel to the hit “Halo” video game for Microsoft’s Xbox 360 console.

“This is a difficult quarter, right in front of Windows 8,” BGC Partners analyst Colin Gillis said. “But there’s plenty of positives to take from” the Q1 report. He says the company’s server business is doing well and sees the company moving to adapt to the shift to mobile.

“If they were not positioning themselves for the future, I’d be much more worried,” Gillis said. “Clearly (the PC industry) is in decline. But it’s not dead. This is why this is a value story at this juncture. (Microsoft is) still highly profitable and paying a decent dividend.”

Analysts polled by Thomson Reuters expect Microsoft to earn 87 cents a share, up 12%, on sales of $22.98 billion, up 10%, in the current quarter. Microsoft did not give fiscal Q2 sales and earnings guidance Thursday.

For the second quarter in a row, Microsoft deferred revenue from presales of its Windows 8 and Office 2013 software. The deferrals added up to $1.36 billion in sales and 13 cents of earnings per share. It will account for those deferrals in the December quarter.

Microsoft CEO Steve Ballmer tried to direct attention forward. “The launch of Windows 8 is the beginning of a new era at Microsoft,” Ballmer said in a statement. “Investments we’ve made over a number of years are now coming together to create a future of exceptional devices and services, with tremendous opportunity for our customers, developers, and partners.”

In a conference call with analysts, Microsoft Chief Financial Officer Peter Klein said sales were hurt by “a challenging PC market, normal purchasing slowdowns in advance of upcoming product launches and tough economic conditions, particularly in Europe.”

PC makers slowed purchases of Windows licenses in preparation for Windows 8, Klein said.

Microsoft saw “healthy renewals” of enterprise software licensing in Q1, he said.

Klein said the company’s product launch schedule is its largest ever. “In a 12-month period, we will have refreshed nearly all of our major products,” he said.

In Q1, Microsoft’s server and tools division saw double-digit revenue growth in SQL Server, a database system, and System Center, a systems management product. The division’s sales rose 8% from a year ago to $4.55 billion. Also, Microsoft launched its Windows Server 2012 software in September.

Microsoft’s business division, which includes Office, saw a 2% decline in revenue to $5.5 billion.

But the flagship Windows unit, the operating system that runs most PCs, suffered a 33% drop in sales to $3.24 billion. Even adding in presales of Windows 8, division sales would have fallen 9% in Q1.

Microsoft’s entertainment and devices division, which includes the Xbox video game business, saw sales slip 1% to $1.95 billion.

And the online services unit, which includes Bing search and MSN, hiked revenue 9% to $697 million. But the unit still lost $364 million, adding to cumulative losses of $16 billion the past six years.

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