Windows growth flat but Microsoft promises smaller devices

Microsoft sees quarterly profits of $6bn despite fading PC market

Reuters Stewart Mitchell
19 Apr 2013

Windows has effectively shown no revenue growth over the past quarter, Microsoft revealed in its latest round of financial results.

Microsoft posted an 18% increase in revenue and 19% climb in profit well ahead of Wall Street expectations - a seemingly strong performance for a quarter with the worst decline in PC sales on record.

Excluding revenue "deferred" from previous quarters, the flagship Windows unit showed zero growth, disappointing investors hoping for a stronger showing from Windows 8. Microsoft didn't reveal any detail on Windows 8 sales figures.

However, business software licenses have helped cushion the blow from falling PC demand - Microsoft makes 20% its Windows revenue from new devices, versus 45% by business customers on licensing agreements for Windows and Office.

"Microsoft has successfully transitioned into an enterprise software company and these results show that, because the strength of server and tools and the actual way they sell licenses to business is making up for the missing PC sales," Kim Caughey Forrest, an analyst at Fort Pitt Capital, told Reuters.

While there is still work to do, we are optimistic that the bets we’ve made on Windows devices position us well for the long-term

Many in the industry had hoped the arrival of Microsoft's touch-friendly Windows 8 software might give the shrinking PC market a shot in the arm. But industry analysts have since noted that the unfamiliarity of the 'tile'-based interface and the paucity of competitively-priced gadgets turned off consumers.

This week, Intel forecast its current-quarter revenue would decline as much as 8% as personal computer sales continue to slide in favour of tablets and smartphones, but it expects sales in general to improve in the second half as more polished ultra-thin laptops and other tablet devices based on Windows hit the market.

New devices

During conference calls the company also said it was working with OEMs on new Windows 8 devices at a variety of price points, appearing to confirm rumours of Windows 8 running on smaller devices such as 7in tablets to rival the iPad Mini and Google Nexus 7.

Although the company gave few details, CEO Steve Ballmer implied the company was positioning itself for a wider range of device options for Windows 8.

"While there is still work to do, we are optimistic that the bets we’ve made on Windows devices position us well for the long-term," he said.

Profits up

Microsoft reported a profit of $6 billion in the fiscal third quarter, up from $5.1 billion in the same quarter a year ago.

Profit was boosted by some deferred revenue from its Windows, Office and video game operations, but cut severely by a $733 million fine by European antitrust regulators for breaking promises relating to expanding the choice of browsers on Windows.

Overall, sales rose to $20.5 billion from $17.4 billion a year ago, in line with analysts' estimates.

"There's nothing in the report that's going to make the stock break out of the range that it's been in," said Colin Gillis, an analyst at BGC. "The stock's trading at $29.11 - what we were at 11 years ago."

CFO leaves

Microsoft's chief financial officer Peter Klein is leaving the company after three and a half years in the post.

The 11-year Microsoft veteran becomes the latest in a line of top-level executives to leave the company, following Windows head Steven Sinofsky last November. Some have questioned whether Ballmer is still the right leader for Microsoft, whose shares have remained essentially flat for the last decade.

Microsoft said a new CFO would be named in the next few weeks from within its ranks.

"The CFO departure is a little bit troubling," said Brendan Barnicle, an analyst at Pacific Crest Securities. "We've had a lot of executives leaving Microsoft recently. This also makes a departure by Steve Ballmer less likely. It would be very unusual to have a CEO leave soon after a CFO departure."

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