Holiday Sales Didn't Help Microsoft

First appeared in NY Times
Weak sales of personal computers made for a tough holiday selling season for Microsoft.

The results, released Thursday after the markets closed, are a sign of the challenges that Microsoft, which is based in Redmond, Wash., faces as it tries to adapt to deep changes in the technology industry. While Microsoft continues to reap profits from products like Windows and Office, growth is shifting away from the personal computer industry on which those two software franchises rest toward mobile devices like tablets and smartphones.

The company said net income in its second quarter, which ended Dec. 31, declined slightly to $6.62 billion, or 78 cents a share, from $6.63 billion in the year-earlier period. The company said revenue was up 5 percent at $20.89 billion.

The earnings exceeded the expectations of Wall Street analysts, who had predicted 76 cents a share, though Microsoft fell short of their revenue forecast of $20.93 billion, according to a survey of analysts by Thomson Reuters.

The PC market is looking increasingly shaky. Microsoft said revenue from Windows, one of the pillars of its profits, fell 6 percent, to $4.74 billion, in the quarter.

Brendan Barnicle, an analyst at Pacific Crest Securities, said that most analysts had braced for poor Windows sales but that the actual numbers were worse than most had expected.

“We were negative 4 percent, and they still missed,” he said.

In an interview, Microsoft’s chief financial officer, Peter S. Klein, said the decline in Windows sales was the result of problems in the consumer market, not purchases of PCs by businesses, which continued to grow during the quarter. He said the sales of the inexpensive laptops known as netbooks were especially bad, falling to 2 percent of worldwide consumer PC shipments in the quarter, from 8 percent a year earlier.

Worldwide shipments of PCs fell 0.2 percent during the fourth quarter from the year-earlier period, while PC shipments in the United States fell 5 percent for all of 2011, the worst showing since 2001, according to the International Data Corporation. IDC attributed the anemic results to weak economic conditions and shortages of hard disks caused by flooding in Thailand, a manufacturing center for those devices.

The weakness in Microsoft’s report also reflects competition from cellphones and tablets like Apple’s iPad.
After stumbling in mobile phones and tablets in recent years, Microsoft finally has software products for these devices that are winning positive early reviews. But Microsoft’s tablet and cellphone plans have not yet begun to produce big sales.

The company released its redesigned mobile operating system, Windows Phone, in fall 2010, but the first smartphones that used the software were lackluster and had tepid support from wireless carriers. Microsoft is betting that a partnership with Nokia, the Finnish cellphone maker, will help turn around its mobile business. The first devices from their collaboration went on sale only recently.

Meanwhile, Apple’s iPhone and smartphones based on Google’s Android operating system are devouring most of the market. During the fourth quarter, Android phones accounted for 51.7 percent of the smartphones acquired by United States consumers within three months, while the iPhone accounted for 37 percent, according to estimates by Nielsen. Phones running Microsoft software, including an older operating system it is no longer developing, accounted for 3.8 percent, Nielsen said.

Microsoft is also developing a new version of its flagship operating system, Windows 8, to run tablet computers. Early test versions of the software have been praised by developers and technophiles. The software is not expected to go on sale until late this year, though.

Other parts of Microsoft’s business are performing well, especially its entertainment and devices division, dominated by sales of the Xbox video game system and related products. Revenue from that division grew 15 percent to $4.24 billion from the year-earlier period, reflecting strong sales of the Xbox 360 console, the Kinect game sensor and the Xbox Live online game service.

Another standout was Microsoft’s server and tools division, which sells databases and other software to businesses. That division’s sales rose 11 percent, to $4.77 billion.