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Microsoft Profit Exceeds Estimates on Xbox, Corporate Demand

Microsoft Profit Tops Estimates on Xbox, Demand
Attendees play with Microsoft Corp.'s Xbox 360 game console during the Consumer Electronics Show in Las Vegas on Jan. 11, 2012. Photographer: David Paul Morris/Bloomberg

Microsoft Corp., the world’s largest software maker, reported second-quarter profit that beat estimates, lifted by holiday sales of Xbox machines and Kinect sensors, as well as corporate software demand.

Net income was $6.62 billion, or 78 cents a share, compared with $6.63 billion, or 77 cents, a year earlier, Microsoft said today in a statement. Sales rose to $20.9 billion, matching estimates. Analysts had predicted 76 cents in profit on average, according to data compiled by Bloomberg.

Microsoft’s Xbox business got a boost from Christmas shoppers, who snapped up its video-game consoles and Kinect sensor controllers, and signed up for the Xbox Live online service. That helped make up for Windows sales hurt by sluggish demand for personal computers and a shortage of hard drives stemming from floods in Thailand.

“Xbox looks strong and Xbox Live looks really strong,” said Kim Caughey Forrest, an analyst at Fort Pitt Capital Group Inc., which owns Microsoft shares. Sales of Office programs also performed well, she said. “Those were all good things to see.”

Microsoft shares rose in extended trading after the report. The stock, which declined 7 percent last year, had decreased less than 1 percent to close at $28.12 in regular trading.

Lower Costs

Microsoft also lowered its operating-cost projections. In the fiscal year that began July 1, the expenses will be $28.5 billion to $28.9 billion, down from an October forecast for $28.6 billion to $29.2 billion.

Unearned revenue, a measure of future sales, was $15.3 billion, above the $15.1 billion average estimate compiled by Bloomberg. The category shows Microsoft continues to sign multiyear agreements with corporate customers.

“We have some headwinds from a challenging PC market, but Office and Server and Tools continue to grow very nicely,” Microsoft Chief Financial Officer Peter Klein said in an interview. “Xbox and Xbox Live had another strong holiday season.”

The supply of computers to stores and companies was hampered by flooding in Thailand, a disaster that wiped out about a quarter of the world’s hard-drive manufacturing capacity. That led PC shipments to decline 0.2 percent in the fourth quarter, according to IDC, instead of the 5.1 percent increase initially predicted. Gartner Inc., another research firm, said PC shipments dropped 1.4 percent.

Threat From IPad

The flooding compounded the woes of PCs, which are being pushed off consumer wish lists in favor of smartphones and Apple Inc.’s iPad. Heather Bellini, an analyst at Goldman Sachs Group Inc., says Windows revenue is unlikely to recover substantially in the next few quarters. The disk-drive shortage will continue to hurt the industry, and customers are waiting for Microsoft’s new Windows 8 before they buy PCs, she said.

Drive shortages and concerns about the economy are likely to persist throughout the March quarter, Klein said. Microsoft may have a hard time keeping some PC users from switching to tablets and smartphones until Windows 8 goes on sale, he said. Klein declined to provide a release date.

In addition to adding new PC features, Windows 8 will have a touch-screen interface designed for tablets and will work with ARM Holdings Plc chip technology. That will help manufacturers produce machines that can rival the iPad in battery life and speed.

Windows Decline

Microsoft’s Windows division posted a 6.3 percent decline in sales to $4.74 billion last quarter, missing the $4.9 billion estimated by analysts. Windows revenue has fallen short of analysts’ estimates in four of the past five quarters.

The Business division’s sales, largely made up of Office products such as Word and Excel, rose 2.8 percent to $6.28 billion. That beat the $6.1 billion average estimate of analysts. Server and tools software was $4.77 billion, compared with the $4.8 billion average estimate. The Xbox unit posted sales of $4.24 billion, topping the projection of $4.2 billion.

The Xbox business had its best week ever in terms of U.S. sales, setting a record during the seven days after Thanksgiving. Microsoft has now sold a total of 66 million Xbox machines and 18 million Kinect motion sensors, which let users control games with body motion. Forty million customers have signed up for the company’s Xbox Live online gaming and entertainment service, the company said earlier this month.

Corporate Sales

Microsoft has relied on corporate demand for its Office and server software, as well as business purchases of PCs, to shore up earnings in recent quarters. Many business customers have multiyear agreements with Microsoft, helping insulate the company from quarterly fluctuations in demand.

Klein said the company hasn’t seen any weakness in corporate demand and isn’t expecting that to change. Products such as the SharePoint program for hosting websites and the Lync software for messaging and teleconferencing are selling well among businesses, he said.

Even so, corporate budgets for 2012 look to be “conservative,” Bellini said in a note before the earnings report. Outside of Germany, demand in Europe will be “soft,” putting pressure on Microsoft’s corporate sales for the next few quarters, she said.

“You have to be concerned about the corporate engine running out of steam,” said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon, who rates the shares “sector perform.”

Download: Earnings

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