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2011-01-28 20:33:44
By Bill Rigby Bill Rigby Fri Jan 28, 1:58 am ET
SEATTLE (Reuters) Sales of Microsoft Corp's Windows software fell short of
outsized expectations, rekindling fears that the spread of mobile gadgets will
erode its main PC-focused business.
Microsoft surprised Wall Street with a better-than-expected profit, helped by
resurgent corporate spending after the belt-tightening of past years. But its
shares stayed flat as investors expressed concern about the weakness of overall
computer sales amid a faltering U.S. recovery.
The world's largest software maker, whose Windows operating system runs on 90
percent of the world's computers, is heavily dependent on PC sales, which grew
only 3 percent in the quarter. Now it is starting to feel the heat from
investors eyeing the phenomenal take-up of Apple Inc's iPad.
"Outstanding numbers when you take a first look at it, but when you delve into
them, Windows missed expectations by $300 million," said Brendan Barnicle,
analyst at Pacific Crest Securities.
Sales of smartphones and tablets are expected to grow much more quickly than
PCs over the next few years, posing a threat to Microsoft's key market.
With the migration to mobile devices from desktop computers expected to
accelerate, Apple overtook Microsoft to become the largest U.S. technology
company by market value last May.
But some analysts argued that fears of tablets and other hot-selling gadgets
replacing PCs were overblown -- at least for now.
"We've gotten over 300 million Windows 7 licenses sold. I mean, PCs are not
disappearing. Put that into perspective with 7 million tablets sold last
quarter from Apple," said BGC Financial's Colin Gillis.
"Clearly there are disruptions in the landscape, but some of the negative
viewpoints are overblown."
Microsoft stock is down about 3 percent over the past 12 months, compared with
a 24 percent gain for the tech-heavy Nasdaq. Apple shares are up 65 percent
over the same period.
EARLY RELEASE
The results surprised the market after being discovered online by data search
firm Selerity, which posted profit and revenue numbers on Twitter at 2:50 p.m.
EST.
Trading in Microsoft's shares spiked just under an hour later, after blogs and
news agencies started reporting the earnings from the web page discovered by
Selerity, sending the shares up as much as 2 percent to $29.46. They ebbed back
to $28.87 at the close, a 0.3 percent gain for the day. They drifted slightly
lower in after-hours trading.
"A preproduction draft of our earnings release was discovered by one or more
media sources who then published our results to the web before market close,"
said a Microsoft spokesman, who apologized for any confusion and said the
company was reviewing procedures to make sure it does not happen again.
WINDOWS FALLS SHORT
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, 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 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.