Windows Falls Short

By Reuters  |  Print this article Print

Microsoft Windows sales fell short of expectations, fueling fears that the rise of tablets is hurting the company. But Kinect remains a bright spot for Microsoft.

Though Microsoft faces longer-term challenges in the PC arena, its other core product, its suite of Office applications, generates strong cash flow.

Sales at its Office unit rose 24 percent to $6 billion, indicating that U.S. businesses are starting to spend more on technology after the recession.

But consumers are proving less resilient. U.S. initial jobless claims surged in the latest week to their highest since October, indicating that any recovery in consumer spending will come only in fits and starts.

Sales for its Windows unit fell 30 percent to $5.054 billion, a little short of analysts' expectations of about $5.3 billion, due to the lukewarm growth in PC sales. The year-ago figure was swollen by $1.71 billion in deferred revenue and pre-sales from the launch of Windows 7.

The perennially money-losing online services division, home of the Bing search engine, posted a 19 percent increase in sales, but saw its loss widen 17 percent to $543 million. The unit, which is making only slight headway against Google Inc (NASDAQ:GOOG), has lost more than $6 billion in the last five years.

Unearned revenue -- a measure of the strength of the business in Microsoft's pipeline -- fell 9.5 percent to $13.4 billion, a cause of concern to some investors.

Kinect The Best Hope?

Microsoft reported overall fiscal second-quarter profit of $6.63 billion, or 77 cents per share, compared with $6.66 billion, or 74 cents per share, a year earlier. The per share figure was higher due to a reduction in shares outstanding from last year.

Wall Street was expecting 68 cents per share profit, according to Thomson Reuters I/B/E/S.

Sales rose 5 percent to $19.95 billion, helped by strong sales of its Kinect hands-free gaming system and Xbox consoles, handily beating analysts' average estimate of $19.15 billion.

"Kinect represents the most legitimate opportunity we have seen for the Xbox to drive some profit. I do think there is a meaningful catalyst there," said Motley Fool senior analyst Tim Beyers. "The Windows phone looks good. I do think that Windows Phone 7 is proving to be an interesting alternative to the Blackberry.

"I guess the nut of it is, Microsoft is starting to do something better and they are not tripping on themselves, and that counts for something."

Microsoft now has $41.2 billion in cash and short-term investments on its balance sheet. Chief Financial Officer Peter Klein said he was happy with the cash it is distributing to shareholders, holding out little hope of a dividend hike, which some investors would like to see.

(Editing by Edwin Chan and by Phil Berlowitz)