Slowdown In Consumer PC Market Hits Microsoft's Windows Sales

A slowdown in consumer PC sales worldwide took a toll on sales of Microsoft’s flagship Windows software in the second fiscal quarter, the company said Thursday.

But increased sales of business software products, such as SharePoint, Exchange, Lync and Dynamics CRM, fueled the company’s overall growth in the quarter.

“Despite a challenging PC market, we delivered solid financial results,” said CFO Peter Klein in a conference call with financial analysts. “We saw strong demand for our business products and services, and had a record holiday season.”

For the fiscal 2012 second quarter ended Dec. 31 Microsoft reported sales of $20.89 billion, up 5 percent from $19.95 billion in the second quarter of fiscal 2011. Net income for the quarter was $6.62 billion, virtually flat with the $6.63 billion reported for the same period one year earlier.

The sales from one year ago were inflated by $224 million in deferred revenue related to the Office 2010 technology guarantee program, according to Microsoft.

Microsoft’s Windows and Windows Live Division posted revenue of $4.74 billion, a 6 percent drop from $5.06 billion in the same quarter one year ago. That decline came despite Microsoft’s selling more than 525 million Windows 7 licenses since the launch of that edition of Microsoft’s flagship product in October 2009.

Microsoft is scheduled to release a beta of Windows 8, the next generation of the PC operating system, late next month.

“The PC market was challenged this quarter with particular softness in the consumer segment,” Klein said. The decrease in Windows sales reflected an overall decline in the PC market of between 2 and 4 percent, according to Microsoft, with sales of consumer PCs dropping 6 percent. Microsoft estimated that sales of PCs to businesses grew 2 percent year-over-year.

Microsoft blamed the slowdown in PC sales on macroeconomic uncertainty, flooding in Thailand that reduced supplies of disk drives, and “competing form factors” – the latter a reference to growing sales of tablet computers such as Apple’s popular iPad that are eroding sales of traditional desktop PCs and laptop computers.

While Microsoft reported weaker demand in the PC market Thursday, Intel reported record annual revenue thanks to strong PC chip sales.

Microsoft expects the disk drive shortage to continue for at least the next quarter, Klein said.

The Microsoft Business Division reported second quarter sales of $6.28 billion, a 3 percent gain from $6.11 billion in sales in the same period one year earlier. That gain would have been 7 percent, excluding the Office 2010 deferred revenue in the earlier quarter. Microsoft said nearly 200 million licenses of Office 2010 have been sold in the 18 months since its launch.

The division also got a boost from the 10 percent increase in sales of SharePoint and Exchange software, and a 30 percent increase in revenue from Lync and Dynamics CRM.

Microsoft’s Server & Tools business recorded $4.77 billion in sales in the second quarter, up 11 percent from $4.29 billion one year earlier. The results reflected double-digit revenue growth in sales of Windows Server and SQL Server premium editions and more than 20 percent growth in sales of System Center.

“The Server and Tools business delivered another strong quarter as we continue to execute on our strategy of cloud-optimizing every business,” Klein said. That growth should continue with the recently introduced System Center 2012 and upcoming Windows Server 8 and SQL Server 2012 releases, he said.

The Online Services Division reported revenue of $784 million, up 10 percent from $713 million in the year-earlier period. Microsoft said its Bing search engine was gaining market share, including traffic generated through an advertising alliance with Yahoo.

The strongest growth in the quarter came from the Entertainment & Devices Division, which reported sales of $4.24 billion, up 15 percent from $3.70 billion one year earlier. “Xbox 360 had a record holiday season as we continue to differentiate home entertainment,” Klein said. The Xbox 360 installed base now totals 66 million consoles and 18 million Kinect sensors, according to Microsoft. Xbox Live now has 40 million members, up 33 percent from one year ago.

“The overall business environment remains strong for us,” Klein said.