News

Microsoft's Q1 Earnings Take a Hit in Struggling PC Market

• By Kurt Mackie
• October 18, 2012

Microsoft on Thursday reported an 8% revenue shortfall from the year-ago period in its Q1 earnings report for fiscal-year 2013.

Revenue for the quarter was $16 billion, compared with $17.4 billion in Q1 2012. Net income was $4.5 billion, down from $5.7 billion in the last first quarter. Earnings per share was $0.53, down from $0.68 in the last Q1 period.

The bad news was expected by financial analysts, but it was slightly worse than expected, with predictions for $0.57 earnings per share.

Microsoft indicated that its earnings were off due to the "Windows Upgrade Offer, pre-sales of Windows 8 to OEMs prior to general availability, and the Office Offer." It provided non-GAAP estimates claiming that when these factors were accounted for, the company actually had a flat quarter year-over-year with revenue of $17.4 billion.

Division Results
In any case, the division taking the biggest hit for the company this quarter was the Windows Division. Revenue from that division totaled $3.2 billion, representing a 33% decrease from the previous fiscal year's Q1 result of $4.9 billion. The company's earnings report claims that under non-GAAP reporting, this quarterly loss would be more like 9%.

"While enterprise revenue continued to grow and we managed our expenses, the slowdown in PC demand ahead of the Windows 8 launch resulted in a decline in operating income," said Peter Klein, Microsoft's chief financial officer, in a prepared statement.

Analyst and consulting firm IDC recently reported that an 8.6% contraction in worldwide PC shipments occurred in the third quarter of calendar-year 2012, which doesn't suggest a positive outlook for Microsoft's Windows Division in the near term. Microsoft plans to launch its new Windows 8 operating system on October 26, but it will be heading into a generally bad PC market.

The Business Division brought home $5.5 billion, down 2% from $5.6 billion in the last Q1 period. The loss was attributed to deferred income from the Office offer. The Business Division previously had been the big money maker in Microsoft's fiscal-year 2012 Q4 financials.

The Entertainment and Devices Division was flat, delivering $1.9 billion in revenue. Showing a small gain, surprisingly, was Microsoft's Online Services Division, which brought in $697 million vs. $641 million of revenue in the prior period. However, the Online Services Division continued to carry an operating income loss -- this time measured at $364 million. Most attribute the ongoing losses in the Online Services Division to Microsoft expenses in pursuing Google in the search-advertising business.

The Server and Tools Division did OK this quarter, bringing in $4.5 billion vs. $4.2 billion in the last Q1 period -- representing and 8% increase. Microsoft indicated that it had "double-digit revenue growth in SQL Server and more than 20% growth in System Center revenue" coming out of this division.

Windows 8 Is Coming
Overall, Microsoft's Windows cash cow division took a hit this quarter amid declining PC sales. It's an ominous sign as Microsoft gets ready to launch Windows 8 next Friday. Windows 8 will be available on multiple form factors and even a new ARM-based platform with Windows RT tablets and devices. The company has already certified "more than 1,000 systems for Windows 8" with its hardware partners, according to Kevin Turner, Microsoft's chief operating officer.

Microsoft is attempting to narrow the lead on mobile devices with Windows 8 that is already seen with Android and Apple iOS devices. However, Windows 8 will offer a radically different user interface that looks more like the UI on Windows Phone, which could stump some of the public or put off business adoption.

Microsoft's Q1 earnings and other financial reports can be found at its investor relations page here.