Profits dip as Microsoft keeps mum on Surface sales

Microsoft sees profits slide, as wait for Office 2013 hits the bottom line

Reuters Barry Collins
25 Jan 2013

The wait for Office 2013 and an unspectacular start for Windows 8 have resulted in a dip for Microsoft's quarterly profits.

Long gone are the days when a new version of Windows sent Microsoft's profits soaring. But reported sales of 60 million Windows 8 licenses, and Microsoft's refusal to disclose sales of its Surface tablet, have still left market watchers nonplussed.

Demand is stronger than supply across a number of key device types, whether Windows tablets, convertibles, or all-in-ones

"There's still no sign that Windows 8 is a gangbuster," said Andrew Bartels, an analyst at Forrester Research. "Compared to prior periods, where you saw a big increase when a new one came out, you're not seeing that."

Profit at the world's largest software company slid to $6.4 billion in the fiscal second quarter, from $6.6 billion in the year-ago quarter.

Overall sales rose 3% to $21.5 billion, Microsoft said, in line with analysts' estimates.

The biggest factor weighing on Microsoft was a 10% decline in sales at its Office unit to $5.7 billion, which took into account the loss of deferred revenue relating to discounted upgrades to the new version of the software, expected shortly.

"It's a pause before a product launch, which is typical," said Josh Olson, an analyst at Edward Jones.

Windows sales jumped 24% to $5.9 billion, slightly ahead of analysts' average expectations, which had been gradually lowered over the past few months. That also included deferred revenue relating to discounted upgrades.

Microsoft said it has sold more than 60 million Windows 8 licenses since its late-October launch, broadly in line with Windows 7 sales three years before.

"Windows 8 continues to have an uphill battle in convincing investors this is going to be the key to the growth story for Microsoft," said Daniel Ives, an analyst at FBR Capital Markets. "It continues to be a major prove-me product cycle."

Microsoft did not detail sales of its new Surface tablet, although chief financial officer Peter Klein said the company was expanding production and distribution.

Windows executives suggest that Windows will win more people over when new touchscreen devices start hitting the shelves in coming months.

"Demand is stronger than supply across a number of key device types, whether Windows tablets, convertibles, or all-in-ones," Tami Reller, chief financial officer of Microsoft's Windows unit, told Reuters earlier this month. "Most of the opportunity is still ahead of us."

Analysts seem prepared to give Microsoft more time to prove its point.

"It's been disruptive but the PC market is far from dead," said Colin Gillis, an analyst at BGC Financial. "Even if it has minimal success with Surface, it doesn't need much to move the needle."

Microsoft shares have fallen 2% since Windows 8 was launched on 26 October, compared to a 5% gain in the tech-heavy Nasdaq composite index.

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