Microsoft Windows Misses Estimates as Consumers Pick IPad

Microsoft Corp. (MSFT), the world’s top software maker, reported third-quarter sales in the Windows division that missed analysts’ predictions as consumers shunned its products in favor of tablets such as Apple Inc.’s iPad.

Revenue in the unit that includes Windows fell to $4.45 billion, Microsoft said in a statement today. That was shy of the $4.6 billion average prediction of nine analysts surveyed by Bloomberg. Shares slipped in late trading.

Personal computer shipments unexpectedly fell 3.2 percent in the quarter as consumers held off purchases and shifted to tablet computers, IDC said. Multiyear contracts with corporations and robust demand for Office business software couldn’t make up for consumers who are choosing iPads over a new laptop with Windows.

“PCs aren’t being bought and if you are going to buy a laptop you’ll look at an iPad,” said Kim Caughey Forrest, an analyst at Pittsburgh-based Fort Pitt Capital Group Inc. which manages $1.1 billion, including Microsoft shares. “That’s where some of those Windows sales went.”

Microsoft, based in Redmond, Washington, declined as much as 74 cents to $25.97 in extended trading, after gaining 33 cents to $26.71 at 4 p.m. New York time on the Nasdaq Stock Market. The shares dropped 9 percent last quarter, while the Standard and Poor’s 500 Index rose 5.4 percent.

Overtaken By Apple

The results underscore the ascendance of Apple, which surpassed Microsoft as the world’s most valuable technology company in May. Apple’s profit in the period that ended in March almost doubled to $5.99 billion, compared with $5.23 billion for Microsoft in the same period. That was the first time Apple’s profit topped Microsoft’s in two decades.

Industrywide shipments of consumer PCs dropped 8 percent in the quarter while shipments to corporate customers rose 9 percent, Chief Financial Officer Peter Klein said in an interview. Netbooks dropped 40 percent.

“It’s fair to say tablet is some of that,” he said.

Revenue in the Windows division fell 4.4 percent, the second quarter in a row that sales in that unit fell short of projections. Microsoft said in a slide presentation on its website that overall PC sales declined 2 percent last quarter.

“They are growing slower than PCs now,” said Brendan Barnicle, an analyst at Pacific Crest Securities who rates Microsoft “sector perform.” “That’s suggesting some market share loss, some real deterioration.”

Office, Servers Gain

Net income rose to 61 cents a share, from $4.01 billion, or 45 cents, Microsoft said today. Excluding a 5-cent per-share tax benefit, earnings matched the 56-cent average of estimates compiled by Bloomberg.

Sales rose to $16.4 billion, compared with the $16.2 billion average projection. That reflects demand for such products as Office business-productivity software and the programs that run servers, computers that run networks.

“For a long time, I’ve been looking at Microsoft as an enterprise play, rather than consumer, and in that area they didn’t disappoint,” Caughey Forrest said. “Office was good. Servers weren’t bad.”

Sales in the business division, which sells Office software and is the company’s biggest, rose to $5.25 billion, compared with the $4.9 billion average estimate of analysts. Server and Tools unit sales were $4.1 billion, compared with the $4 billion analysts expected.

Yahoo Integration Stumbles

“We are seeing businesses invest in technology,” Klein said. “They are buying hardware and they are buying Microsoft software.” Microsoft expects corporate PC shipments to outpace those for consumers for the rest of the year.

The company is also getting less revenue than expected on a per-search basis from its partnership with Yahoo! Inc., Microsoft’s Klein said. The companies still face integration complications and expect to fix them by year end, he said.

Microsoft said operating expenses in the year that starts July 1 will rise to $28 billion to $28.6 billion. In the current fiscal year they will be $26.9 billion to $27.3 billion, the company said, reiterating a previous forecast.

Unearned revenue, a measure of future sales, was $13 billion, above the average analysts’ estimate of $12.8 billion, according to Bloomberg data.

Apple’s iPad is luring customers from Windows-based PCs as Microsoft tarries in furnishing computer makers with a Windows operating system that’s capable of challenging the iPad. Microsoft won’t release a viable competitor to the Apple and Google Inc. tablet operating systems until the second half of 2012, people with knowledge of the plans said in March.

“Everyone is worried about the Windows numbers,” said Brent Thill, an analyst at UBS AG in San Francisco. “That’s the cash cow and everyone is worried the cow is running out of milk.”

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.

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.