Weak PC Market Catches Up to Microsoft

On Thursday, the company missed Wall Street forecasts, blaming the declining PC market for the shortfall. Microsoft also acknowledged the disappointing sales of one of its most prominent products, its Surface RT tablet computer, by taking a $900 million charge to reflect unsold inventory of the device.

“It finally caught up to them,” said Colin W. Gillis, an analyst at BGC Partners. “We’ve been in a PC recession for five quarters.”

For the fiscal fourth quarter that ended June 30, Microsoft, which is based in Redmond, Wash., reported net income of $4.97 billion, or 59 cents a share, in contrast to a loss of $492 million, or 6 cents a share, in the period a year earlier. Last year, Microsoft took a $6 billion write-down on a soured acquisition, wiping out its overall profit.

In the latest quarter, revenue rose 10 percent, to $19.9 billion, from $18.06 billion a year earlier.

Those results fell well short of the average analyst estimates compiled by Thomson Reuters of 75 cents a share in earnings and $20.73 billion in revenue.

Revenue from Microsoft’s Windows business, which includes its Surface tablet computers, rose 6 percent, to $4.41 billion. But without including the favorable impact from an upgrade offer last year, Microsoft’s Windows revenue fell 6 percent in the quarter.

Last week, the research firm Gartner reported that global PC shipments declined 10.9 percent in the second quarter of the year, the fifth consecutive quarter of declining PC shipments, the longest ever.

Mobile devices have sapped much of the gusto out of the PC market. Many people are buying tablet computers, especially Apple’s iPad, instead of PCs to watch movies, surf the Web and write e-mails.

“We know we have to do better, particularly on mobile devices,” Amy Hood, Microsoft’s chief financial officer, said in an interview.

Ms. Hood said the company’s Windows business is a “tale of two markets,” one in which PC sales to businesses continue to grow modestly, while consumer demand for the machines is fizzling. She estimated that total industry PC shipments to the consumer market fell more than 20 percent during the quarter.

She said that a companywide reorganization that Microsoft announced last week was part of an effort to better position the business for big changes in technology, including the shift to mobile devices.

Until its most recent quarter, Microsoft showed a remarkable aptitude for finding ways to squeeze money out of its venerable business, despite the problems in the PC market. It did that through lucrative multiyear software contracts with corporate customers that tend to move far more slowly than consumers in adopting newer technologies.

Parts of Microsoft that cater more to businesses helped lessen the sting. Microsoft said revenue in its server and tools group rose 9 percent, to $5.5 billion. Revenue in its business division, dominated by the Office suite of applications, jumped 14 percent, to $7.21 billion. But the division grew only 2 percent without deferred revenue related to an earlier upgrade offer.

Office is under siege from a suite of online applications from Google and others, which has led Microsoft to adapt the software so it can be delivered as a service through cloud computing. Microsoft said that if Office 365, the version of its productivity applications that are offered as a service, were to perform for a full year at current levels, it would generate $1.5 billion in revenue.

“The consumer has voted,” said Barbara Coffey, an analyst at SP Capital IQ. “I don’t know that enterprise has yet. We’ve seen such a big shift to tablets. Microsoft just doesn’t play in tablets at the same level that they do in PCs.”

Investors had become more bullish on Microsoft’s ability to navigate the disruption of the PC market, sending its shares up more than 32 percent this year. But after the release of its financial results, shares of Microsoft dropped more than 6 percent in after-hours trading. They ended regular trading at $35.44, down 30 cents.

Article source: http://www.nytimes.com/2013/07/19/technology/weak-pc-market-catches-up-to-microsoft.html?partner=rss&emc=rss