Bloomberg News

Microsoft First-Quarter Sales, Profit Top Analyst Estimates

October 24, 2013

Microsoft First-Quarter Sales, Profit Exceed Analysts’ Estimates

Microsoft, the world’s largest software maker is undergoing unprecedented changes, conducting its first-ever CEO search and starting a major organizational overhaul aimed at bolstering sales by focusing on devices and services. Photographer: Kiyoshi Ota/Bloomberg

Microsoft Corp. (MSFT:US) reported first-quarter sales and profit that exceeded analysts’ projections as the company, which is looking for a replacement for Chief Executive Officer Steve Ballmer, relied on corporate software demand to make up for weak consumer personal-computer purchases.

Net income in the period that ended Sept. 30 rose to $5.24 billion, or 62 cents a share, from $4.47 billion, or 53 cents, a year earlier, Microsoft said today in a statement. Sales climbed 16 percent to $18.5 billion. Analysts on average had predicted profit of 54 cents on $17.8 billion in revenue, according to data (MSFT:US) compiled by Bloomberg. The shares jumped in late trading.

The world’s largest software maker is undergoing unprecedented changes, conducting its first-ever CEO search and starting an organizational overhaul aimed at bolstering sales by focusing on devices and services. Demand for Microsoft’s Office productivity software has helped compensate for declining consumer purchases of PCs running Windows, and the company has been cutting costs to shore up profit.

“Business has been driving the train,” said Colin Gillis, an analyst at BGC Partners LP in New York, who recommends holding the shares. “Most people are really looking through the quarter to the new CEO.”

Microsoft shares rose as much as 7.4 percent to $36.21 in extended trading following the report. They fell less than 1 percent to $33.72 at the close in New York. The stock lost 3.7 percent in the quarter, compared with a 4.7 percent increase in the Standard & Poor’s 500 Index.

Corporate Sales

For the current quarter, Redmond, Washington-based Microsoft forecast higher sales of its commercial products and services, which includes corporate sales of Office and server software, as well strong Xbox demand as a new game console is rolled out. While the company didn’t provide a projection for total revenue, at the low end of the ranges provided for each of five divisions, sales for the fiscal second quarter would exceed the $22.9 billion average estimate of analysts polled by Bloomberg.

Microsoft’s first-quarter revenue got a lift from products like the SQL database server, SharePoint, Exchange for e-mail, and Lync for corporate messaging and telephony. Revenue from commercial cloud products more than doubled.

In the commercial division, which includes these corporate products, licensing revenue jumped 7.3 percent to $9.59 billion, and other corporate revenue, including Internet cloud-based programs, rose to $1.6 billion. That compares with average analysts’ estimates of $9.42 billion and $1.58 billion, respectively, based on four estimates compiled by Bloomberg.

Future Revenue

Unearned revenue, which comes from sales of multiyear deals that will be recognized in the future, was $20.2 billion for the quarter, compared with the $21.1 billion average analyst (MSFT:US) projection, according to data compiled by Bloomberg.

Consumer demand for PCs wasn’t as bad as Microsoft had expected, particularly in developed markets, and corporate PC sales are showing signs of stabilizing, Chief Financial Officer Amy Hood said in an interview. PC sales in China continue to be weak because of excess inventory. Similar trends should persist in the current quarter, she said.

“I thought this was going to be a quiet quarter because we are waiting to see what Surface 2 does at holiday, and waiting for a new CEO, Windows 8 traction and all these things, but it was a very strong quarter,” said Daniel Morgan, a fund manager at Synovus Trust Co. in Atlanta, which owns Microsoft shares.

Consumer Devices

First-quarter sales from devices and consumer hardware, including Surface tablets and Xbox game consoles (MSFT:US), increased 37 percent to $1.49 billion, more than the $1.14 billion average estimate. Devices and consumer licensing, which includes Windows pre-installed on computers, fell 7.2 percent to $4.34 billion, compared with analysts’ average estimates for sales of $4.24 billion.

Surface did better than some analysts projected. Microsoft said it sold $400 million worth of the tablets in the period. Goldman Sachs Group Inc. had estimated the devices and their accessories would pull in $181 million in sales. Microsoft sold more than two times the number of Surface units as the previous quarter, Hood said.

“If you think about all the news that has been going on outside the company, people here have been very focused,” she said. “The team is really dedicated to delivering no matter what.”

New Xbox

The release of the Xbox One in November is likely to be larger in terms of sales than the two previous Xbox console introductions, Hood said.

Commercial licensing sales will be $10.7 billion to $10.9 billion in the second quarter, Hood forecast on a conference call today. Other commercial revenue, which includes the company’s corporate cloud programs, will be $1.7 billion to $1.9 billion, she projected.

In the consumer and devices unit, licensing sales will be $5.2 billion to $5.4 billion; revenue from hardware, which includes the new Xbox, will be $3.8 billion to $4.1 billion; and other consumer products will bring in $1.7 billion to $1.8 billion, she said.

The software maker’s sales growth had been hurt in recent quarters as the PC market contracted amid a transition to mobile devices for surfing the Internet. Worldwide PC shipments fell 8.6 percent last quarter, researcher Gartner Inc. said earlier this month, amid lackluster demand from students returning to school.

Mobile Push

Microsoft’s efforts in mobile phones and tablets have produced little progress in what is already an uphill climb to keep Apple Inc.’s iOS and Google Inc.’s Android operating system from shutting out Windows. Three years after rejiggering its phone software to be more appealing to consumers, Microsoft still has only 3.7 percent share in smartphone operating systems, according to IDC. Its share in tablets in the second quarter came in at 4.5 percent for all versions of Windows, IDC said.

In July, the company’s profit in the fiscal fourth quarter missed projections by the the biggest margin in at least 10 years. Results also were hurt by a $900 million writedown of inventory of Surface tablets. The company cut prices for the devices, which first went on sale a year ago, to clear inventory ahead of the introduction of updated models this week.

Ballmer’s Departure

A week before the fourth-quarter earnings miss, Ballmer unveiled Microsoft’s biggest management shuffle in more than a decade, a bid to align the company around hardware and Internet-based services and an attempt to halt the slide of Windows.

Then, in August, the company said that Ballmer, who took over as CEO from co-founder Bill Gates in 2000, will step down from that role within a year. People with knowledge of the matter said earlier this month that the board is aiming to have a successor in place by the end of 2013.

To reinforce its efforts in mobile, Microsoft reached an agreement in September to acquire Nokia Oyj’s handset unit for $7.2 billion. Windows Phone’s third-place ranking in smartphone operating systems in the second quarter compared with 79 percent market share for Google’s Android and 13 percent for Apple (AAPL:US)’s iOS, IDC said in August.

Following the July business reorganization, Microsoft altered how it reports revenue from different units, opting for a structure that splits sales into a total of five segments and provides operating income for two larger categories: one for commercial business, such as Windows and Office corporate software licenses and services; and the other for devices and consumer products, including Xbox, Surface, consumer Windows sales and its Bing search engine.

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

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net


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