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October 18, 2012

Microsoft Q1 Sales and Earnings Drop in a Shifting Technology Market

By Amanda Ciccatelli, TMCnet Web Editor

This afternoon Microsoft Corp. reported a drop in first quarter sales and earnings as the software giant prepares for the launch of Windows 8 and deals with a rapidly shifting market.

Microsoft’s (News - Alert) quarterly revenue is $16.01 billion for the quarter ended Sept. 30, 2012. Operating income, net income and diluted earnings per share for the quarter were $5.31 billion, $4.47 billion and $0.53 per share. These results reflect the deferral of $1.36 billion of revenue and $0.13 of diluted earnings per share due to the Windows Upgrade Offer, pre-sales of Windows 8 to OEMs prior to general availability and the Office Offer.

"This quarter’s earnings reflect our solid growth in multi-year licensing, but a slowdown in transactional revenue,” said Peter Klein (News - Alert), CFO at Microsoft, in the earnings statement today. 

Image via Shutterstock

Despite the expected decline, many analysts are giving Microsoft the benefit of the doubt, since the drop in PC sales has been attributed to buyers putting off purchases ahead of the launch of the Windows 8 operating system. Robert Breza, who covers Microsoft for RBC Capital Markets, told NASDAQ that he expects Microsoft to show strength in its enterprise business, but "the larger issue has been continued soft trends in the PC market."

Last week, Gartner Inc. and IDC (News - Alert) released statistics showing worldwide PC shipments dropped eight percent in the third quarter of this year. However, some analysts are concerned the PC market is under long term threat from new products like tablets. Microsoft is moving into this space as well, as Windows 8 is designed to work with a touch-screen interface and standard keyboard.  The company has set a $499 starting price and Oct. 26 release date for the first version of its own Surface tablet.

“Investments we’ve made over a number of years are now coming together to create a future of exceptional devices and services, with tremendous opportunity for our customers, developers, and partners,” said Steve Ballmer (News - Alert), chief executive officer at Microsoft, in a statement.

“Whether we build our own devices or work with our partners, we will continue to offer a wide range of choices so that every user can get exactly what they want with the price that is right for them,” said Klein.

With PC demand down, Rick Sherlund of Nomura Equity Research, noted that Microsoft's stock has underperformed the market by about nine percent since the company last reported quarterly results in July. He doesn’t think Windows 8 will be a "quick fix" for Microsoft, but he does expect the company to see payoffs going into next year, as both Windows 8 and the upcoming release of the Office 2013 suite of software see increased adoption among businesses and consumers.

Sherlund said, "We expect that the issues for Microsoft will ultimately resolve favorably and Windows 8 together with Office 2013 will be perceived as a more-functional device."

Klein said, “Our collaboration and communication solutions continue to perform well, so our customers continue to make long term commitments to the Microsoft platform. As we enter this new era at Microsoft there is incredibly opportunity for sustained profit growth in the future.”

Edited by Amanda Ciccatelli
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