Microsoft Profit Tops Estimates on Corporate Demand

Microsoft Corp., the world’s largest software maker, said second-quarter profit topped analysts’ estimates as corporate customers bought more Office and server programs and consumers purchased Xbox Kinect motion sensors.

Net income was $6.63 billion, or 77 cents a share, compared with $6.66 billion, or 74 cents, a year earlier, Microsoft said today in a statement. Sales rose 4.9 percent to $20 billion. The results beat the average projections of 68-cents in profit and $19.1 billion in sales, according to data compiled by Bloomberg.

Companies are installing new Office software and buying more server programs, helping Redmond, Washington-based Microsoft make up for the industry’s lower-than-expected PC sales to consumers. The company also tapped demand for video- game devices, selling 8 million Kinect devices, more than twice its initial forecast.

“They beat on revenue and profit and showed some nice expense control,” said Katherine Egbert, an analyst at Jefferies & Co. in San Francisco. “The business side is good and then Kinect was good.”

Microsoft slipped 9 cents to $28.78 in extended trading, after gaining 9 cents to $28.87 at 4 p.m. New York time on the Nasdaq Stock Market. The shares fell 8.4 percent last year.

Second-quarter unearned revenue, a measure of multiyear contracts, was $13.4 billion, missing analysts’ $14.1 billion average estimate, according to data compiled by Bloomberg.

“The reason the stock is off is the unearned revenue number -- some people were expecting more,” Egbert said. “People are worried that perhaps they drew down the backlog in order to make this quarter.”

‘Small Impact’

Windows unit sales also fell below estimates as some consumers put off PC purchases and others opted for Apple Inc.’s iPad tablet. The company saw a “small impact” from competition with tablet PCs but it was “not material,” Microsoft Chief Financial Officer Peter Klein said in an interview.

The lower unearned revenue was partially because Microsoft sold more copies of Office to small and medium-sized businesses that bought the software outright rather than through multiyear deals, which fall into the unearned line item, Klein said.

PC shipments in the quarter rose 2.7 percent, below the 5.5 percent projected by researcher IDC in Framingham, Massachusetts, as consumers held off purchases and some opted for Apple Inc.’s iPad tablet computer instead.

At the same time, International Business Machines Corp. and EMC Corp. have reported increased corporate demand for computers and servers, which run business networks and websites.

Corporate Business

Klein expects enterprise PC sales to continue to outpace consumer sales for the rest of Microsoft’s fiscal year.

“Microsoft has been executing extremely well on the business side,” Robert Breza, an analyst at RBC Capital Markets, told Bloomberg Television. “As people start to really focus on Microsoft and what they are doing in cloud computing -- with their Azure platform -- also with their new Office 365 program that sits in the cloud, hopefully that will get the company a little bit more respect.”

Breza, based in Minneapolis, rates Microsoft “outperform.”

Revenue from contracts that have been signed but not yet billed to the customer rose above $16.5 billion, Klein said. It ended the first quarter above $16 billion.

Operating expenses for the year ending June 30 will be $26.9 billion to $27.3 billion, Microsoft said, reiterating an October forecast. Last quarter, the company was able to hold down expenses, making it the sixth straight quarter in which profit margins expanded, Klein said.

The company doesn’t provide outlooks for sales and profit. Analysts estimate third-quarter earnings of 56 cents a share and sales of $16 billion.

Revenue Breakdown

Sales in the Windows unit fell to $5.05 billion. That’s partly because a year earlier, $1.71 billion in deferred sales were recognized. Analysts predicted $5.2 billion in Windows sales, the average of analysts’ estimates compiled by Bloomberg.

In the Business Division, which makes Office software, sales rose to $6.03 billion, compared with projections of $5.36 billion. Server unit sales gained to $4.39 billion. Analysts predicted $4.2 billion. Xbox unit revenue increased to $3.7 billion, compared with the average $3.74 billion estimate.

Microsoft began selling its Kinect sensors, which let users control games with their bodies, in November, at prices that ranged from $149.99 for the product alone to $399.99 for a bundle with a high-end Xbox console. The company had originally forecast sales of 3 million units.

Windows Phone 7

Microsoft also released its overhauled software for mobile phones -- Windows Phone 7 -- during the quarter. The company said yesterday it shipped 2 million licenses to use the software in handsets, a number that analyst Kevin Burden at ABI Research said was disappointing. The company boosted its marketing budget to mount it biggest TV campaign ever for a mobile-phone product.

That was “in line” with what the company was expecting, Klein said.

“It’s a good start,” he said. “I recognize that it’s early and we have a lot of work to do and we’re going to continue to focus on that.”

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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