Microsoft's Windows battles slack PC sales

Microsoft Corp's fiscal second-quarter profit fell very slightly as lagging computer sales to cash-strapped consumers in the United States and Europe hurt its core Windows business. Companies and emerging markets are still hungry for new PCs, according to the latest data, but customers in mature markets are ditching their Windows-powered netbooks in favor of Apple Inc's iPad, Amazon.com Inc's Kindle or postponing a PC purchase until the economy improves.

"There's really three things that impacted the consumer side," said Peter Klein, Microsoft's chief financial officer, reflecting on the dip in computer sales.

"The supply chain from Thailand, there's some macro (economic factors) and certainly some competition from alternative form factors such as tablets and readers."

Tech research firm Gartner reported a 1.4 percent decline in global PC sales for the fourth quarter, aggravated by a shortage of hard disk drives caused by recent floods in Thailand.

Microsoft went further, estimating the PC market fell between 2 percent and 4 percent in the quarter, almost entirely due to the collapse in the market for net books, the small laptops which accounted for one in 12 PC sales last year.

As a result, Microsoft's key Windows unit reported a 6 percent dip in sales to $4.7 billion. The situation shows no immediate signs of improvement.

The company warned that the disruptions in Thailand will continue to affect PC sales in the first part of this year, while it has yet to feel the benefit of new lightweight laptops -- dubbed "Ultrabooks" by chipmaker Intel Corp -- which are just starting to hit stores.

There is also uncertainty over Windows 8, Microsoft's new, tablet-friendly operating system, which is expected later this year but has no firm arrival date. 

"The PC environment is tough and this is reflected in the results," said Global Equities Research analyst Trip Chowdhry. "The question remains, what is going to be the growth catalyst? It's still too early to say whether Windows 8 will be the answer because it won't be released until later this year."

BEATS STREET

Overall, the world's largest software company reported net profit of $6.624 billion, or 78 cents per share, compared with $6.634 billion, or 77 cents per share, in the year-ago quarter.

The per share figure rose as Microsoft had fewer shares outstanding in the most recent quarter. It beat Wall Street's average forecast of 76 cents.

Sales rose 5 percent to $20.9 billion, in line with analysts' forecasts, helped by its Office, server software and Xbox businesses. 

The figure was also boosted by the first inclusion of revenue from Skype, the online phone firm Microsoft bought last year, and a one-time gain of $225 million from favorable foreign currency rates.

"The results are pretty much in line with my expectations. We all expected the PC market to be weak and the Windows business was down because of that. But the server and tools business is growing well," said Sunit Gogia, an equity analyst at Morning star.

Microsoft shares rose 3 percent after hours to $28.95 after closing at $28.12 on Nasdaq. The shares are level with their price a year ago, compared with a 3 percent gain in the Nasdaq.

XBOX, SERVERS GROW

Microsoft's other major units performed much better than Windows. The Office unit increased sales 3 percent to $6.3 billion, helped by relatively strong business tech spending, which is holding up much better than consumer spending.

The server and tools unit, which provides the software and services behind Microsoft's "cloud" -- or Internet-centric computing platform -- posted an 11 percent rise in sales to $4.8 billion.

The entertainment and devices unit reported 15 percent higher sales, largely due to booming sales of the Xbox game console, which has been rejuvenated by its hands-free Kinect sensor add-on. Microsoft has yet to see any jump in revenue from the new range of Windows phones made by Nokia and others, which it is now rolling out. 

Microsoft's perennially money losing online services unit posted a 10 percent gain in sales, as the Bing search engine grabbed more market share, now taking 15 percent of US Internet searches, just ahead of Yahoo Inc but still well behind market leader Google Inc.

The online unit managed to cut its losses 18 percent in the latest quarter to $458 million, helped by higher advertising sales. But Microsoft has lost more than $5 billion in the unit since it launched Bing in mid-2009, as it invests heavily to catch up with Google.