SEATTLE — Microsoft’s biggest product in decades, Windows 8, helped lift sales of the company’s flagship operating system business, but not enough to rejuvenate overall growth.
Microsoft Reports Drop in Profit By NICK WINGFIELD
Published: January 24, 2013
Don Emmert/Agence France-Presse — Getty Images
Microsoft’s pop-up store in Times Square was set up for the fall release of its Surface tablet, which was available only in the company stores until recently.Microsoft, based in Redmond, Wash., said on Thursday that its profit declined 4 percent in the holiday quarter as its entertainment and office divisions posted double-digit declines in revenue.
While Microsoft has a sprawling portfolio of technology products, like the Xbox game console and programming tools, Windows 8 was its star offering over the holidays, the product’s first quarter on the market.
Windows 8 features one of the most radical redesigns of the operating system, with a tile-based interface intended to take better advantage of computers with touch screens, including tablets. Apple’s iPad has been nipping into sales of low-end laptop computers for some time, a trend Microsoft and its partners in the PC business desperately want to stop.
There have been mounting signs in recent weeks that sales of new computers running Windows 8 have been sluggish. This month, IDC reported that worldwide PC shipments declined 6.4 percent in the fourth quarter, as Windows 8 failed to reverse a slide in PC sales that continued throughout most of 2012.
Microsoft’s sales of Windows, which powers the vast majority of personal computers, appeared to be healthier than those numbers would indicate. It said its revenue from its Windows business, which accounts for more than a quarter of total company revenue, rose 24 percent to $5.88 billion for the fiscal second quarter ended Dec. 31.
Those figures, however, included revenue from Windows sales before the product was officially available last November. Microsoft was required to defer that revenue because of accounting rules. Without it, Windows sales would have grown only 11 percent.
While sales of Windows tend to closely track the performance of the PC market, Microsoft also sells Windows 8 upgrades to people who already have PCs. For the first time last quarter, the company’s Windows business also included sales of Microsoft’s own tablet computer, Surface, which it was not offering in the same period a year earlier.
In an interview, Peter Klein, the chief financial officer of Microsoft, said that in some cases, sales of Windows 8 were hurt by the limited availability of computers with touch screens that more fully exploit the capabilities of the software: “We need to do more of those.”
“I think we’ve learned a lot,” Mr. Klein said. “Business PCs are growing faster than consumer, emerging markets are growing faster than developed.”
He declined to say how many Surface tablets Microsoft had sold, but he suggested the number was small because of the limited retail distribution of Surface, which was only available in Microsoft’s own stores until recently.
The company said its net income for the quarter was $6.38 billion, or 76 cents a share, compared to $6.62 billion, or 78 cents a share, in the same period a year earlier.
Revenue rose 3 percent to $21.46 billion from $20.89 billion a year ago.
Analysts surveyed by Thomson Reuters, on average, had expected Microsoft to report earnings of 75 cents a share and revenue of $21.53 billion. The company’s shares were down 0.4 percent in after-hours trading.
Microsoft’s results showed far more vitality in areas in which the company caters to big business customers, rather than consumers — a market that has eluded Microsoft many times over the years. Its best performing business was its server and tools division, which had a 9 percent increase in sales in the quarter.
While its Office suite of applications showed weakness overall, as some customers delayed purchases ahead of the release of a new version of the product, business revenue from that division was up 2 percent and consumer revenue declined 2 percent, excluding deferred revenue.
Other consumer-oriented divisions struggled, including entertainment and devices, the group dominated by the Xbox game console, which had an 11 percent decline in sales.
Microsoft and its partners sold four times as many Windows Phones during the holiday quarter as they did a year earlier, Mr. Klein said. That is good news for Microsoft’s struggling mobile phone initiative, though the company still has a negligible share of the market.
Revenue from Microsoft’s online services, which Bing is a part of, grew 11 percent, but the division continues to hemorrhage money.
“It shows that Microsoft is evolving really into an enterprise software company,” said Bill Whyman, an analyst at ISI Group.