Sales of Video Game and Flagship Software Lift Microsoft
Microsoft’s profit engine is humming along nicely, even if most investors remain unimpressed and the software giant’s stock price is stagnant.
Microsoft reported strong gains on Thursday in its first-quarter profit and revenue because of robust sales in its mainstay business of selling personal computer software to businesses, which have increased their technology spending.
Peter Klein, Microsoft’s chief financial officer, called it “an exceptional quarter” that combined brisk sales to business customers with solid demand in consumer businesses like its Xbox gaming consoles and games.
The results demonstrated that the company has the financial ballast to keep investing in newer businesses like Internet search and smartphone software, where it trails the leaders, Google and Apple.
Yet to investors, it seems, the tug of concern about future growth diminished enthusiasm for the vigor in its flagship businesses today. Microsoft’s profits and revenue are more than 70 percent higher than five years ago. But its shares closed the regular session at $26.28 on Thursday, only a dollar or so higher than five years ago. In after-hours trading, the shares added about 3 percent.
Microsoft delivered net income of $5.41 billion, a 50 percent increase from the quarter a year ago, when it reported a profit of $3.57 billion. The company earned 62 cents a share, well above the 55 cents a share average estimate among Wall Street analysts, as compiled by Thomson Reuters.
Microsoft reported revenue of $16.2 billion, up 25 percent from the $15.8 billion last year and higher than the consensus forecast by analysts.
The quarterly performance set a record for Microsoft. But the company’s growth was magnified by the deferral of $1.47 billion in the quarter a year ago, for business customers who had paid in advance under long-term contracts for the new version of the PC operating system, Windows 7.
Without the effect of that one-time deferral, Microsoft’s revenue would have increased 13 percent and net income 16 percent. Those lower rates are the more accurate measure of the company’s growth trajectory.
Recent reports of weaker-than-anticipated PC shipments raised doubts about how well Microsoft would do. This month, Gartner, the research group, reported that worldwide PC shipments rose 7.6 percent in the third quarter, below its previous projection of 12.7 percent. The research firm attributed the shortfall to softer demand for consumer PCs in the United States and Western Europe.
Apple’s iPad, according to Jason Maynard, an analyst at Wells Fargo Securities, may help explain the weakness in that niche of the global PC market. Apple sold 4.2 million iPads in the third quarter, Mr. Maynard said, and many consumers seem to be buying iPads instead of inexpensive PCs.
In a conference call with analysts, Microsoft said it expected tablet-style machines, including ones running Windows, to expand the consumer computer market rather than cannibalize PC sales.
In the quarter, sales of PCs to business customers were brisk, which helped to strengthen earnings. Microsoft sells more costly versions of its Windows operating system and Office productivity software, carrying higher profit margins, to companies.
For example, analysts estimate that the price of Windows to PC makers of the high-end business version is about $65 a copy, compared with $40 a copy for home PCs and $25 a copy for the stripped-down version loaded on netbook machines.
Despite Microsoft’s financial strength, doubts remain about its chances in new markets, like Internet search and smartphone software. It trails far behind Google in search and mobile phone software, and Apple in the smartphone market.
In the last month, Microsoft has shown signs of improvement in both areas. But catching up will be a daunting task. A few weeks ago, Microsoft introduced new smartphone software, Windows Phone 7. Reviews have praised the new software as a big advance for Microsoft in that market, but one that still leaves its software well behind Apple’s iPhone operating system.
In search, Microsoft struck a deal with Facebook so that users’ “like” recommendations will show up in Bing search results.
In a separate deal, Microsoft’s Bing will be used for shopping searches on Taobao.com, a major Chinese buying site, which is a subsidiary of Alibaba.
Still, those businesses, even if lagging, are not where Microsoft makes its living.
“Microsoft is certainly growing,” said Richard T. Williams, an analyst at Cross Research. “People tend to look at Microsoft as if it had the same business profile as Apple, which is 90 percent a consumer business. But more than 80 percent of Microsoft’s business is corporate.”
The division selling Xbox consoles and games grew 27 percent, to $1.79 billion, including 2.8 million consoles sold in the quarter. Still, the $382 million in operating profit from that consumer business is more than overshadowed by a $560 million loss from its other mainly consumer business — the online services division, which includes Bing search. That loss is 17 percent higher than the $477 million the unit lost a year ago.
