Bloomberg News

Microsoft Contracts Gain as Companies Upgrade Software

July 20, 2012

Microsoft Multiyear Contracts Gain

Microsoft Corp. sales rose 4 percent to $18.1 billion, compared with the $18.2 billion average projection. Sales were shored up by companies pushing forward with planned upgrades to software that runs corporate computers. Photographer: David Paul Morris/Bloomberg

Microsoft Corp. (MSFT:US) had a bigger gain in multiyear software deals than analysts predicted last quarter, a sign that businesses are flocking to the company’s programs as consumers delay purchases or opt for competitors.

Fourth-quarter unearned revenue, a yardstick of future sales, was $20.1 billion in the three months that ended June 30, Redmond, Washington-based Microsoft said yesterday in a statement. Analysts on average expected $19.4 billion, according to Heather Bellini, an analyst at Goldman Sachs Group Inc. Bellini’s own estimate was for $18.9 billion.

Unearned sales got a boost as companies placed long-term orders for such products as Office and database software. Business buying helped compensate for diminished demand from consumers awaiting the Oct. 26 release of Windows 8, the next version of Microsoft’s main operating system, or opting for tablets made by Apple Inc. (AAPL:US) and other computer manufacturers.

“Microsoft is a very strong enterprise player, Tony Ursillo, an analyst at Loomis Sayles & Co., said in an interview yesterday. ‘‘There was lots evidence in tonight’s report that they are a force to be reckoned with in the enterprise.’’

Profit -- excluding a writedown that gave Microsoft its first loss as a publicly traded company -- also topped estimates after Microsoft reined in expenses. Excluding the writedown, related to the purchase of AQuantive Inc., profit was 67 cents a share. That exceeded the 62-cent average estimate compiled by Bloomberg (MSFT:US). Sales rose 4 percent to $18.1 billion, compared with the $18.2 billion average projection.

Expense Reduction

Sales and marketing costs dropped 3.5 percent to $3.78 billion. Those savings, as well as a tax rate that was lower than analysts had predicted, contributed to profit, Microsoft Chief Financial Officer Peter Klein said in an interview.

Microsoft shares (MSFT:US) fell 1.8 percent to $30.12 at the close in New York. The stock has gained 16 percent this year. It fell 5.2 percent in the three months through the end of June, compared with a 3.3 percent drop for the Standard and Poor’s 500 Index.

During the quarter, Microsoft wrote down $6.2 billion for the impairment of goodwill related to its $6.3 billion purchase of Internet-advertising company AQuantive, an indication the company’s online business won’t grow as quickly as Microsoft once projected. That non-cash charge is not factored into analysts’ quarterly profit estimates.

Microsoft said operating expenses for the year that began July 1 will be $30.3 billion to $30.9 billion, reiterating a projection made in April.

PC Weakness

Revenue in the Windows division fell 13 percent to $4.15 billion, below the $4.44 billion average estimate of analysts surveyed by Bloomberg. That was the fifth time in seven quarters that the unit has fallen short.

Consumer PC demand was weaker than corporate demand in the period, as was the case in other recent quarters, Klein said. The trend will probably start reversing with the release of Windows 8, he said. He declined to give a projection. Windows sales have suffered as some consumers opt for tablets instead of cheaper laptops running Windows.

‘‘Windows 8 has to work for them,” Ursillo said. “Tablets are a big phenomenon on the consumer side, and it’s a big pool of revenue that Microsoft needs to participate in.”

Global PC shipments stalled in the quarter, marking a seventh-straight quarter of tepid growth, amid weakness in Europe and the growing popularity of tablets, research released this month by Gartner Inc. showed.

Top chipmaker Intel Corp. (INTC:US) this week scaled back its annual sales forecast as personal computer-demand fails to rebound among consumers in the U.S. and Europe.

Low Expectations

Tablets with Windows 8, including Microsoft’s first-ever foray into the computer hardware market with its own Surface tablet, are set to go on sale Oct. 26. Until then, Microsoft won’t be able to materially reverse the trend of customers defecting to rivals’ tablets, Klein has said.

Sales in the Business Division, largely made up of Office software, rose 7.1 percent to $6.29 billion. That compares with the $6.35 billion average analyst estimate.

The company is also in the final stages of development on a new version of Office, code-named Office 15, which was unveiled and released in a public test version this month.

Server and Tools revenue rose 13 percent to $5.09 billion. Analysts had estimated $5.18 billion, on average.

Revenue in Entertainment and Devices, the unit that includes the Xbox gaming console, rose 20 percent to $1.78 billion. That compares with a $1.66 billion average estimate.

“It was a great fourth-quarter for them in terms of signing contracts,” said Colin Gillis, an analyst at BGC Partners LP. “Let’s be honest, it wasn’t the highest bar for them this quarter because of the poor macroeconomic environment and the PC market. People weren’t expecting that much.”

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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