Bloomberg News

Microsoft Relying on Gaming, Cloud to Weather PC Storm

October 25, 2013

Microsoft Corp. Surface Pro 2 Tablet Computer

First-quarter sales from devices and consumer hardware, including Surface tablets and Xbox game consoles, increased 37 percent to $1.49 billion, more than the $1.14 billion average estimate. Photographer: Ron Antonelli/Bloomberg

Microsoft Corp. (MSFT:US) is weathering slumping personal-computer sales by focusing on Xboxes, business software and cloud services, as departing Chief Executive Officer Steve Ballmer seeks to make the company less dependent on its Windows operating system.

Microsoft reported fiscal first-quarter sales and profit yesterday that topped analysts’ average estimates (MSFT:US) on demand for Office programs and database servers. The company’s revenue forecast for the current quarter was also ahead of projections.

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. Companies are snapping up products such as Web-based cloud services and the Lync instant messaging and voice software, bolstering sales even as consumers purchase fewer PCs running Windows.

“It’s good revenue growth, but the question going forward with these new initiatives is, will they generate the billion-dollar numbers we need to drive the top line number and to say Microsoft is really invigorated,” said Daniel Morgan, a fund manager at Synovus Trust Co. in Atlanta, which owns Microsoft shares.

Microsoft, based in Redmond, Washington, rose 6 percent to $35.73 at the close in New York, the biggest increase in two months. The shares fell 3.7 percent last quarter, compared with a 4.7 percent increase in the Standard & Poor’s 500 Index.

Corporate Sales

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. 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.

For the current quarter, Microsoft forecast higher sales of its commercial products and services, which includes corporate sales of Office and server software, as well as 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 such as the SQL database server, SharePoint, Exchange for e-mail, and Lync for corporate messaging and telephony. Revenue from commercial cloud products more than doubled.

Future Revenue

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.

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.

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 yesterday. 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.

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 (NOK1V)’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.

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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