Bloomberg News

Microsoft Sales Exceed Estimates on Strong Corporate Demand

October 21, 2011

Oct. 21 (Bloomberg) -- Microsoft Corp., the largest software maker, reported first-quarter sales that topped analysts’ predictions as companies invested in Office and server programs, outweighing poor consumer demand for computers.

Sales rose 7.3 percent to $17.4 billion, compared with the $17.2 billion average analyst estimate compiled by Bloomberg. Net income in the period that ended in September rose 6.1 percent to $5.74 billion, or 68 cents a share, from $5.41 billion, or 62 cents, a year earlier, Microsoft said yesterday in a statement. Profit met the average 68-cent projection.

Corporate customers are buying Office productivity software as well as the Windows operating system and databases for their networks. Microsoft is also benefiting from the revenue that comes from multiyear contracts sold to businesses. That’s helped compensate for waning consumer personal-computer purchases.

“People are still buying billions of dollars worth of Microsoft products every month,” said Colin Gillis, an analyst with BGC Partners in New York. “This is not going away.”

Microsoft, little changed in extended trading, fell 9 cents to close at $27.04 in U.S. trading yesterday. The shares had declined 3.1 percent this year before today.

Redmond, Washington-based Microsoft said operating expenses in the year that started July 1 will rise to $28.6 billion to $29.2 billion, above the $28 billion to $28.6 billion it forecast in April and reiterated in July.

Unearned revenue, a measure of future sales, was $15.7 billion in the first quarter, above the $15.5 billion average analyst estimate compiled by Bloomberg.

‘Bit of Relief’

Microsoft is bearing up well, even amid sluggish economic growth and lackluster demand for personal computers, said Tony Ursillo, an analyst in Boston at Loomis Sayles & Co., which owns Microsoft shares.

“The results might be viewed as a bit of a relief, given the ongoing concerns about the PC market and the macroeconomic environment,” Ursillo said.

Corporations are buying machines pre-loaded with Windows 7 and upgrading to Office 2010, which was released more than a year ago. Server software like the Windows version for corporate networks and the SQL database are also propelling revenue growth.

Business division sales, mostly consisting of Office software, rose 7.7 percent to $5.62 billion, compared with the $5.5 billion analysts had expected. Server unit sales rose 10 percent to $4.25 billion. Analysts had projected $4.3 billion.

Budgets ‘Squeezed’

Spending by businesses may slow down if the economy doesn’t improve, said Josh Olson, a technology analyst at Edward Jones & Co.

“Enterprise budgets are going to be squeezed to some extent going forward,” Olson said. “The picture isn’t as rosy as we had thought six months back.”

PC weakness held back growth at Microsoft’s Windows division, where sales rose 1.7 percent to $4.87 billion, shy of the $4.9 billion average analyst estimate compiled by Bloomberg.

Total PC shipments rose less than forecast in the third quarter, dragged down by disappointing back-to-school sales, economic frailty and a shift to tablets and smartphones, according to Gartner Inc. Shipments climbed 3.2 percent, below the 5.1 percent growth it previously projected.

A total of 91.8 million PCs were shipped in the period. Apple Inc. sold 11.1 million iPad tablets at the same time, setting a record for the product.

PC Weakness

The PC market will grow 4.2 percent to 361.6 million units this year as consumers buy fewer machines, according to market researcher IDC. In the same period, the smartphone market will jump 55 percent to 472 million units, making it bigger than PCs by that measure for the first time, IDC said.

Demand for tablets is taking a bigger toll on low-memory netbook computers than on standard PCs that run Windows, said Bill Koefoed, general manager of investor relations at Microsoft.

“When people need to do work, to create content, they are using a PC,” he said.

Even so, Microsoft is rushing to complete a new version of Windows capable of running smaller, thinner tablet computers with battery life to rival that of the iPad. The company showed the new software at a conference in September and got some encouraging reviews. It won’t be ready until next year, people familiar with the matter said in March.

Jane Snorek, a senior research analyst at Nuveen Asset Management, which owns Microsoft shares, said that may help the company gain a foothold in the tablet market.

“I don’t think the stock does anything until that gets resolved,” Snorek said.

--Editors: Lisa Rapaport, Jillian Ward

To contact the reporters on this story: Adam Satariano in San Francisco at; Dina Bass in Seattle at

To contact the editor responsible for this story: Tom Giles at

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