--Surface helped drive 11% revenue growth in Windows unit in the
quarter
--Yahoo partnership contributing to revenue per search at
Bing
--Enterprise deals including more software, in addition to
server and tools
(Updates beginning in the fourth paragraph with CFO comments
from earnings call.)
By Steven D. Jones and Nathalie Tadena
Microsoft Corp.'s (MSFT) fiscal second-quarter earnings slipped
3.7% as the software company reported weaker sales in its business
and entertainment divisions, though revenue in its core Windows
business strengthened.
The latest period marks the first quarter to include sales of
the company's new Windows 8 operating system and its Surface
tablet, which both debuted in late October and contributed to an
adjusted 11% increase in Windows division revenue. Several analysts
have estimated around 1 million Surface tablets sold over the
holidays, about half the number expected, but Microsoft expressed
confidence in the launch.
"Surface was part of the overall Windows 8 story," Chief
Financial Officer Peter Klein said in an interview. "Several things
drove the 11% growth in Windows, and Surface was one of them."
The Redmond, Wash., software company has been squeezed by a
shift in consumer and business spending to tablets and smartphones
and away from PCs. Several companies, including chip-maker Intel
Corp. (INTC) and Dell Inc. (DELL) were hoping Microsoft's new
Windows 8 operating system would improve PC demand.
Mr. Klein told analysts on the earnings call Thursday that
retail sales of Windows 8 upgrades, Surface and multiyear license
agreements were the three major contributors to the 11% revenue
gain for Windows. Microsoft has increased Surface production in
advance of the introduction of the Surface running Windows 8 Pro
and distribution of the original Surface to 14 additional
countries, he said.
Sales of Windows Phones by all manufacturers are on a pace four
times higher than a year ago, and users have downloaded more than
100 million apps for the devices, he said.
Shares of Microsoft slipped 1.6% to $27.19 after hours Thursday.
Through the close, the stock is down 5.8% over the past 12
months.
Mr. Klein said there were centers of strength in PC buying, with
business demand growing more than consumer, and emerging-market
demand growing faster than in developed markets. Dozens of new PCs
and the more powerful ultrabook laptop computers coming to market
this year also should spur buyer interest. Microsoft's own Surface
Pro, running a more powerful version of the Windows operating
system, is coming to market in the coming days.
Revenue for online services, which includes the company's Bing
search engine, increased 11% in the period, largely thanks to an
increase in revenue per search, said Mr. Klein, although he
declined to share specific numbers. Microsoft partners with Yahoo
Inc. (YHOO) in the search business.
"We're seeing benefits now from the Yahoo partnership start to
show through in our revenue per search," he said. "We're very
pleased with the progress there."
Revenue for the company's servers and tools products, which form
the backbone of enterprise networks and private clouds, was up
9.5%, while the segment's profit advanced 8.8%.
The unit benefited from "more deals and more product sold within
those deals," said Mr. Klein. Customers are frequently buying
utilities, such as SharePoint for document sharing, Exchange for
email and messaging, and Lync for collaboration at the same time
they purchase Windows for an enterprise, he said.
At the business division, which earns most of its sales from
Microsoft Office, sales fell 9.8%. The segment's profit declined
15%. Microsoft is poised to launch a new edition of its Office
software this spring. It introduced Office 365, the cloud version
of the software, last year.
Cloud services also are boosting revenue at the group because a
"cloud purchase will sort of mirror a multiyear annuity," Mr. Klein
said. Cloud customers have high renewal rates and frequently buy
additional services when they do so.
Microsoft--whose software has long been used in most personal
computers--has been looking to better compete in the fast-growing
mobile market with the launch of Windows 8, which runs on both
traditional PCs and tablet computers
The latest period included $1.3 billion in revenue deferred for
the company's Windows upgrade offer, Office upgrade offer and
presales, and the entertainment and devices division's videogame
deferral, which was partially offset by the recognition of $783
million of previously deferred revenue for Windows 8 presales.
For the quarter ended Dec. 31, Microsoft reported a profit of
$6.38 billion, or 76 cents a share, down from $6.62 billion, or 78
cents a share, a year earlier. Excluding the impact of deferred
revenue and revenue recognized for Windows 8 presales, adjusted
earnings were 81 cents a share.
Revenue increased 2.7% to $21.46 billion. Adjusted revenue
totaled $22 billion.
Analysts polled by Thomson Reuters had projected earnings of 75
cents a share and revenue of $21.53 billion.
Total operating expenses jumped 10%.
Microsoft's Windows and Windows Live division saw revenue climb
24%. Adjusting for the deferred revenue and the recognition of
previously deferred revenue, the division's revenue increased 11%
for the quarter. The segment's profit improved 14%.
Sales at the entertainment-and-devices business, which houses
the Xbox video game console, declined 11% though profit was up
15%.
-Write to Steve Jones at steve-d.jones@dowjones.com and Nathalie
Tadena at nathalie.tadena@dowjones.com