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Microsoft takes income hit prior to Windows 8 launch

Microsoft experienced a rough quarter, with a 22 percent decline in net income and an 8 percent decline in revenue

Facing a sluggish PC market and deferring revenue from sales of its upcoming Windows 8 OS, Microsoft reported US$4.47 billion in net income for its first fiscal quarter of 2013, a 22 percent decline from the same period a year earlier.

The company reported revenue of $16.01 billion for the quarter that ended Sept. 30, an 8 percent decline from last year. This figure fell short of what many analysts had expected the company to generate for the period. A poll from Thomson Reuters found that analysts, on the average, expected the company to earn around $16.42 billion in revenue for the quarter.

The company had generated $1.36 billion of revenue from customers who already purchased copies of Windows 8 and the next version of Microsoft Office, but Microsoft did not include this income because these products have not been released yet. With these sales factored in, Microsoft revenue would be approximately the same as it was for the same quarter in the previous year.

In the statement that accompanied the earnings announcement, Microsoft Chief Financial Officer Peter Klein attributed the slack in revenue to a slowdown in the demand for PCs due to the pending Windows 8 launch, while noting that other sectors of Microsoft continued to perform well.

Microsoft CEO Steve Ballmer did not address the slump in sales in the statement, but characterized the quarter as the end of an era for Microsoft, with the company focusing on building new products, such as Windows 8 and Windows Phone 8, that would address shifting market needs.

"The launch of Windows 8 is the beginning of a new era at Microsoft," Ballmer stated. "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."

It has been a busy quarter for Microsoft. The company released the newest edition of its operating system for servers, Microsoft Server 2012, in September. In July it released a preview of the next version of its office productivity suite, Microsoft Office 2013. Most importantly, next week Microsoft will launch its next-generation operating system, Windows 8, which was designed to work on both traditional computers as well as on tablet devices, including the company's own Surface tablet.

For the quarter, the Windows division posted revenue of $3.24 billion, a 33 percent decrease from the same period of the prior year.

The Server and Tools business generated $4.55 billion, an 8 percent increase from the same quarter in the prior year. SQL Server and System Center in particular were strong sellers. The Microsoft Business Division generated $5.50 billion in first-quarter revenue, a 2 percent decrease from the prior year period. It too was affected by pre-sales deferrals, as the company deferred reporting revenue of Microsoft Office 2013. The company noted that some products in this division, such as SharePoint and Exchange, drove double-digit revenue growth.

Online Services enjoyed a 9 percent increase in revenue, to $697 million, thanks to ad revenue in search. The Entertainment and Devices Division, which manages the company's Xbox gaming and multimedia console, posted revenue of $1.95 billion, a decrease of 1 percent from the same period in the prior year.

Financial analysts covering Microsoft seemed to be most concerned about how the shifting PC market would affect future sales of Windows, to judge from the questions they asked during an investor teleconference call held after the release of the financial results. How will the proliferation of new form factors for computers -- tablets, convertibles, all-in-ones -- alter the usually predictable sales of the Windows OS?

Microsoft positioned Windows 8 as an OS that can encompass this wider market. This OS, unlike competitors such as iOS and Android, can offer a single unifying experience across different devices.

"The exciting thing about Windows 8 is that it really redefines what people think about devices, and how they think about devices," Klein responded. "Up until now, [customers] have been forced to choose between PCs and tablets, and make trade-offs of what they get. With Windows 8, you can get whatever you want at whatever price you want."

The adoption process of Windows should continue unabated, Klein said. Enterprise rollouts are steady, and Windows XP will reach end of life in a year-and-a-half, which will spur demand for the new OS.

The weakening demand for Windows over the past three months was due to a number of seasonal and situational factors, Klein explained. OEMs spent the past quarter letting their stock of Windows 7 machines dwindle in anticipation of new Windows 8 machines. Economic sluggishness around the globe -- and in Europe in particular -- slowed sales as well.

"It's a summer quarter, I don't know if I would read too much into one period," added Frank Brod, Microsoft's chief accounting officer, who also was on the investor call.

Joab Jackson covers enterprise software and general technology breaking news for The IDG News Service. Follow Joab on Twitter at @Joab_Jackson. Joab's e-mail address is [email protected]


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