Microsoft Posts Record Revenues, but Sales of Windows Are Weak

The software giant’s mixed financial results, reported Thursday, showed a company struggling with the muted demand for computers while winning strong sales for Xbox 360 and products for business customers.

Sales of Microsoft Corp's flagship Windows software disappointed for the third straight quarter, taking the gloss off better-than-expected earnings that were aided by an unusually low tax rate. Photo: Tsukubajin/Flickr

Microsoft Corp. posted record fourth-quarter and full-year revenues on Thursday despite sluggish sales of its flagship Windows software, which were impacted by Apple’s iPad and iPad 2, as consumers shifted away from PCs to tablets.

The software giant reported Q4 revenues of $17.4 billion, an 8% jump over the same quarter in 2010. Revenues for its fiscal year, which ended June 30, were also a record $69.9 billion, up 12% from fiscal 2010.

“We felt like it was a very solid close to a very solid fiscal year,” Peter Klein, Microsoft’s chief financial officer, said in an interview.

The company’s net income for the quarter was $5.87 billion. For the year, it was $23.2 billion. Those were increases of 30% and 23%, respectively.

The net income was above the expectations of Wall Street analysts. They had expected 58 cents a share and revenue of $17.25 billion, according to a survey of analysts by Thomson Reuters.

Bright spots for fiscal 2011 included the Microsoft Business Division, which grew its revenues 16% for the year, and Server & Tools, which expanded 11%.

Online Services revenues also jumped 15%, driven by the growth of Bing, the company’s search engine. Entertainment & Devices grew its revenues 45% for the year thanks to the successful Kinect introduction and continued strong sales for Xbox 360 and Xbox Live.

The Kinect game controller, which users operate by using their entire body, helped lift sales in Microsoft's entertainment division. Photo: Vancouver Film Schoo/Flickr

On the other hand, Windows and Windows Live revenues fell 2% for the year even though Windows 7 sold more than 400 million licenses. Microsoft estimates that sales of PCs to consumers fell 1% for the fiscal year to $4.74 billion, though sales of PCs to businesses rose 11%.

It’s the second consecutive quarter that Microsoft’s Windows revenue has fallen, a trend that Microsoft executives expect to continue because of the weakness in PC sales.

The division’s fortunes are closely tied to PC sales, which worldwide grew 2.6 percent in the quarter, according to IDC, the market research firm.

The shifting demand toward tablets is worrisome to Microsoft because most tablets run on Apple’s operating system or on Google’s Android software.

Microsoft Corp’s earnings compare unfavorably with Apple’s Q3 earnings, which were also announced this week. Apple’s quarterly revenues hit a record $28.57 billion and earnings were another record at $7.31 billion.

Apple sold 9.25 million iPads during the quarter, an increase of 183% compared to the same period in 2010. Mac sales also jumped 14%.

Tablet manufacturers have shown little interest in adopting Windows, leaving Microsoft out of what some of its executives had thought was a niche product. Sales of tablets are expected to triple to 43.6 million units in 2011 from a year earlier, according to eMarketer, a market research firm.

Brendan Barnicle, an analyst with Pacific Crest Securities, said that Microsoft was trying to make inroads in tablets with an updated version of Windows, to be available in 2012. If it turns out to be “interesting, but not game-changing, then this deterioration will continue,” he said.

Mr. Klein said Microsoft would have more to say about its plans for tablets at its developer conference in September.

Microsoft is also struggling with getting its Windows Phone 7 operating system on smartphones. Earlier this year, Nokia agreed to make phones that used Windows, but the partners have yet to introduce any devices.

In an ominous sign, Nokia said on Thursday that its smartphone sales fell 32 percent in the quarter. The decline shows eroding demand for Nokia’s products and the difficulty Microsoft faces in competing against Apple and Google.

The company still has strengths. Revenue from its Office software, which includes Word, grew 7 percent, to $5.78 billion. The company has said that the latest version, Office 2010, is being deployed at a rate five times faster than its predecessor.

An 8 percent decline in revenue from Office to consumers was offset by a 12 percent gain with business customers. Microsoft attributed the weak consumer results, as it did with its operating system, to sales in emerging markets. Revenue from servers and tools, a division that caters to corporate customers, grew 12 percent to $4.64 billion.

A particular bright spot in Microsoft’s portfolio was its entertainment products and devices like the Xbox 360 video game console and the Kinect game controller, which lets users move their bodies to control characters in video games. Sales by the division grew 30 percent, to $1.49 billion.

Microsoft’s shipments of Xbox 360 game consoles increased 13 percent to 1.7 million, underscoring its popularity among gamers. “They are continuing their amazing momentum this year,” Mr. Klein said.

Microsoft’s perennial money-losing online services unit, which runs the Bing search engine and MSN Internet portal, posted a 16.5 percent increase in sales to $662 million, but its loss widened to $728 million from a loss of $688 million a year ago, as Microsoft continues to pour money into attacking Google. The unit has now lost almost $6.5 billion in the last three fiscal years.

Shares of Microsoft fell less than half a percent to $26.99 in after-hours trading. In regular trading, they closed nearly flat at $27.10. [via Reuters, Mashable and NY Times]

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