PC slump puts Microsoft off forecast

A crowd fills a Microsoft retail store in Portland, Ore., in June. The software company on Thursday reported a quarterly profit of $4.97 billion.
A crowd fills a Microsoft retail store in Portland, Ore., in June. The software company on Thursday reported a quarterly profit of $4.97 billion.

Microsoft Corp.’s profit missed analysts’ projections as Windows sales were hurt by shrinking demand for personal computers amid an unexpected write down of unsold Surface tablet inventory.

Fourth-quarter profit was 66 cents a share, excluding a 7-cent charge related to the inventory adjustment, Redmond, Wash.-based Microsoft said in a statement released Thursday after market close. Sales rose 10 percent to $19.9 billion. Analysts had predicted profit of 75 cents a share on $20.7 billion in revenue, according to the average of estimates compiled by Bloomberg.

Chief Executive Officer Steve Ballmer released Surface, along with a new version of Windows, in October to stem the loss of consumers to mobile devices that offer many of the same features as laptops and desktops. The new products have failed to ignite demand. Personal-computer shipments fell 11 percent last quarter, according to Framingham, Mass.-based IDC.

“This is because of the triple whammy of the economy, tablets and Windows 8,” said Frank Gillett, an analyst at Forrester Research Inc. in Cambridge, Mass.

Surface, Microsoft’s first ever computer, is selling poorly. Just 900,000 units were shipped in the December and March quarters, according to IDC. Microsoft cut the price on one version, Surface RT, this week.

Microsoft fell as much as 5.6 percent in extended trading. The shares declined less than 1 percent to $35.44 at the close in New York. The stock is up 33 percent this year, compared with an 18 percent increase in the Standard & Poor’s 500 Index.

Microsoft Chief Financial Officer Amy Hood said consumer personal-computer shipments dropped 20 percent in the quarter.

“We know we have to do better, particularly on mobile devices and so that’s a big reason we made the strategic and organizational changes we made last week,” she said in an interview. Asked how long it will take for Microsoft’s position in tablets to make up for the contracting personal-computer market, Hood said: “It will take a long time for that to happen.”

Net income for the second quarter was $4.97 billion. The company reported a net loss of $492 million a year ago, which included a $6.2 billion write down related to Microsoft’s 2007 acquisition of AQuantive Inc.

Unearned revenue, which comes from sales of multiyear deals that will be recognized in the future, was $22.4 billion, compared with the $21.8 billion average projection, according to analysts’ estimates compiled by Bloomberg. Revenue was increased by the recognition of sales deferred from previous quarters related to coupons given to customers for Office upgrades.

Ballmer is reorganizing the world’s largest software maker to try to spur better performance in areas such as mobile computing as consumers move to tablets and smartphones. The biggest reorganization of Microsoft in a decade is designed to speed development of hardware and services as the company’s Windows business continues to suffer.

The revamp may result in changes in how Microsoft reports earnings for its various units, Hood said in a conference call last week. Microsoft previously had eight business units and reported earnings broken into five groups. It now has four product-engineering units and hasn’t said how it will handle earnings for the new structure. Thursday’s report is the first being handled by Hood, named in May to replace Peter Klein.

“They’ve got three different headwinds pushing on them, which is why they did the reorganization last week,” Gillett said. “Looking at the progress of this quarter, I bet they wished they did it a year ago.”

Microsoft said it has sold more than 100 million copies of Windows 8. The company is testing an updated version that addresses some customer complaints about the design and adds new features. It’s also working with computer makers to get more machines in stores with touch screens and lower prices.

Microsoft is dealing with five consecutive quarters of declining shipments of personal computers, which researcher IDC predicts will be the worst annual drop on record. Sales in the Windows unit were $4.4 billion, below the $4.8 billion average estimate of analysts polled by Bloomberg.

“Consumer PCs remain pressured,” said Sid Parakh, an analyst at McAdams Wright Ragen in Seattle. “Consumers are buying smartphones and tablets. Microsoft has launched some products in those areas but hasn’t made much headway. They’re late to market, and they’re not competitively priced.”

Business, Pages 23 on 07/19/2013

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