Microsoft Corp. fell after a report showing a shortfall in Windows revenue raised concerns about demand for the operating system and outshined better-than-predicted second-quarter sales and profit.
Windows sales of $5.05 billion missed the $5.2 billion average of analysts’ estimates compiled by Bloomberg. That differed from the 55 percent gain in the Xbox unit, and numbers showing Microsoft’s Office and Server businesses topped projections.
The contrast suggests that Microsoft may be losing sales as customers opt for competing devices, such as Apple Inc.’s iPad or Macintosh computers, rather than a new Windows-based machine, said Tony Ursillo, an analyst at Loomis Sayles & Co. in Boston. As rival operating systems gain ground, Microsoft’s other products, such as Office, may also suffer, he said.
“The execution at this company has actually been pretty good over the last year,” said Ursillo, whose firm manages $150 billion, including Microsoft shares. “The stock has gotten very little credit for it because the market is worried about the continued erosion of the Windows franchise and the potential erosion of the Office franchise.”
Microsoft, based in Redmond, Washington, fell $1.12, or 3.9 percent, $27.75 at 4 p.m. New York time on the Nasdaq Stock Market. The shares lost 8.4 percent in 2010.
Tablet Makes Impact
Microsoft did see a “small impact” from tablets and other types of computing devices, though it was “not material,” Chief Financial Officer Peter Klein said in an interview yesterday.
Apple sold 7.33 million iPad tablet-style machines last quarter, as well as 4.13 million Mac computers. Apple’s share of U.S. PC shipments rose to 8.7 percent in the December quarter from 7.2 percent a year earlier, according to research firm IDC.
Those gains came at the expense of machines that run Windows. To catch up in tablets, Microsoft said this month it would make its next version of Windows run on ARM Holdings Plc’s chip technology for the first time. The aim is to create smaller, thinner Windows tablets with better battery life.
Klein says the tablet market presents an opportunity rather than a threat in the long term.
“I’m more excited about the opportunity,” he said. “All these new devices are market expansive for us.”
Excluding the impact of a $1.71 billion in deferred sales recognized in the year-earlier quarter, Windows unit growth was in line with growth overall in the PC market of 2.7 percent as reported by Framingham, Massachusetts-based IDC. Still, some analysts had projected more.
Windows Phone 7
To address mobile market-share losses to Apple and Google Inc.’s Android operating system, Microsoft released its overhauled software for mobile phones -- Windows Phone 7 -- during the quarter. The company said this week it shipped 2 million licenses to use the software in handsets, a number that analyst Kevin Burden at ABI Research called disappointing.
The number was “in line” with what the company was expecting, Microsoft’s 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.”
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.
Results in Windows overshadowed signs that Microsoft is benefiting from rising demand for gaming devices and products aimed at businesses.
Net income was $6.63 billion, or 77 cents a share, compared with $6.66 billion, or 74 cents, a year earlier, Microsoft said 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.
“Microsoft has been executing extremely well on the business side,” Robert Breza, an analyst in Minneapolis for with 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.”
In the Xbox division, the company kept expenses down, widening margins for a sixth straight quarter.
For some, that doesn’t make up for Windows-related woe.
“Microsoft management has to be frustrated -- they’ve executed well for five quarters in a row and have got little to show for it in the stock price,” Ursillo said. “But they have to take a look at themselves and realize they’re losing share in their most profitable business and coming from way behind in the efforts they needed to stem those losses.”