Microsoft Unearned Revenue Tops Estimates on Upgrades

(Corrects spelling of BGC Partners in final paragraph.)

Microsoft Corp. (MSFT) reported fourth- quarter unearned revenue, a yardstick of future sales, that topped analysts’ estimates, a sign that the largest software maker will benefit from corporate demand for its programs.

Unearned revenue was $20.1 billion in the three months that ended June 30, Redmond, Washington-based Microsoft said today in a statement. Analysts on average expected $19.4 billion, according to Heather Bellini, an analyst at Goldman Sachs Group Inc. Bellini’s own estimate was for $18.9 billion. Profit -- excluding a writedown that gave Microsoft its first loss as a publicly traded company -- also topped estimates after Microsoft reined in expenses.

Unearned sales got a boost as companies placed multiyear orders for such products as Office and database software, even as they delayed other technology purchases amid weakness in the economy. Business buying helped compensate for diminished demand from consumers awaiting the Oct. 26 release of Windows 8, the next version of Microsoft’s main operating system, or opting for machines made by Apple Inc. and other competitors.

“The deferred revenue number was pretty good, which gives you an indication of future growth, so that’s encouraging,” said Brendan Barnicle, an analyst at Pacific Crest Securities who rates the shares “sector perform.” “Given all we know about weakness in PCs, it’s not surprising that sales numbers came in a little light particularly on the Windows side.”

Photographer: Kevork Djansezian/Getty Images

Microsoft CEO Steve Ballmer with the new tablet Surface on June 18, 2012 in Los Angeles. Close

Microsoft CEO Steve Ballmer with the new tablet Surface on June 18, 2012 in Los Angeles.

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Photographer: Kevork Djansezian/Getty Images

Microsoft CEO Steve Ballmer with the new tablet Surface on June 18, 2012 in Los Angeles.

Excluding the writedown, related to the acquisition of AQuantive Inc., profit was 67 cents a share. That exceeded the 62-cent average estimate of analysts compiled by Bloomberg. Sales rose 4 percent to $18.1 billion, compared with the $18.2 billion average projection.

Expense Reduction

Sales and marketing costs dropped 3.5 percent to $3.78 billion. Those savings, as well as a tax rate that was lower than analysts had predicted, contributed to profit, Microsoft Chief Financial Officer Peter Klein said in an interview.

Microsoft shares rose 2.3 percent to $31.38 in extended trading after the report. The stock had gained less than 1 percent to $30.67 at the close in New York. It fell 5.2 percent in the three months through the end of June, compared with a 3.3 percent drop for the Standard and Poor’s 500 Index.

During the quarter, Microsoft wrote down $6.2 billion for the impairment of goodwill related to its $6.3 billion purchase of Internet-advertising company AQuantive Inc., an indication the company’s online business won’t grow as quickly as Microsoft once projected. That non-cash charge is not factored into analysts’ estimates for profit in the quarter.

Microsoft said operating expenses for the year that began July 1 will be $30.3 billion to $30.9 billion, reiterating a projection made in April.

PC Weakness

Revenue in the Windows division fell 13 percent to $4.15 billion, below the $4.44 billion average estimate of analysts surveyed by Bloomberg. That was the fifth time in seven quarters that the unit has fallen short.

Consumer PC demand was weaker than corporate demand in the period, as was the case in other recent quarters, Klein said. The trend will probably start reversing with the release of Windows 8, he said. He declined to give a projection.

Global PC shipments stalled in the quarter, marking a seventh-straight quarter of tepid growth, amid weakness in Europe and the growing popularity of tablets, research released this month by Gartner Inc. showed.

Top chipmaker Intel Corp. (INTC) this week scaled back its annual sales forecast as personal computer-demand fails to rebound among consumers in the U.S. and Europe.

“The macroeconomic environment’s really a little weaker than we saw when we began the year,” Intel Chief Financial Officer Stacy Smith said in a Bloomberg Television interview.

Low Expectations

Windows sales have suffered as some consumers opt for tablets instead of cheaper laptops running Windows.

Tablets with Windows 8, including Microsoft’s first-ever foray into the computer hardware market with its own Surface tablet, are set to go on sale Oct. 26. Until then, Microsoft won’t be able to materially reverse the trend of customers defecting to rivals’ tablets, Klein has said.

Sales in the Business Division, largely made up of Office software, rose 7.1 percent to $6.29 billion. That compares with the $6.35 billion average analyst estimate.

The company is also in the final stages of development on a new version of Office, code-named Office 15, which was unveiled and released in a public test version this month.

Server and Tools revenue rose 13 percent to $5.09 billion. Analysts had estimated $5.18 billion, on average.

Revenue in Entertainment and Devices, the unit that includes the Xbox gaming console, rose 20 percent to $1.78 billion. That compares with a $1.66 billion average analyst estimate.

“It was a great fourth-quarter for them in terms of signing contracts,” said Colin Gillis, an analyst at BGC Partners LP. “Let’s be honest, it wasn’t the highest bar for them this quarter because of the poor macroeconomic environment and the PC market. People weren’t expecting that much.”

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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