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Updated Thursday, January 24, 2013 at 09:46 PM

Windows 8 doesn’t heat up Microsoft 2Q

By Janet I. Tu
Seattle Times technology reporter

While there was no huge jump in numbers fueled by Windows 8, there were no disasters either, as Microsoft on Thursday announced quarterly financial results that, were largely in line with Wall Street’s expectations.

The company fell slightly short of revenue forecasts but exceeded estimates on earnings per share, even as its profit dropped from a year ago. Recent reports of declining PC sales had led to lower analyst expectations.

Microsoft reported record quarterly revenue of $21.46 billion, up 3 percent from $20.89 billion a year earlier.

Profit was $6.38 billion, or 76 cents per share, compared, with $6.62 billion, or 78 cents a share, last year.

For the quarter, which ended Dec. 31 and is the second in Microsoft’s fiscal 2013, analysts had forecast revenue of about $21.5 billion and earnings per share of 75 cents.

Lisa Nelson, a director in Microsoft’s investor-relations department, attributed the revenue bump to strong support from businesses, which drove a 15 percent increase in multiyear licenses, as well as key product launches, such as Windows 8.

The Windows division also did better than some analysts had expected.

The company did not break out numbers on Windows 8, which was launched in October, except to note (as it previously did) that it has sold more than 60 million Windows 8 licenses. That figure includes sales to manufacturers and to retailers.

Microsoft also did not offer sales figures for Surface, its first branded computing devices, or for Windows Phone.

Here’s how the divisions did:

Windows and Windows Live: $5.88 billion in revenue, up 24 percent from $4.74 billion a year earlier.

That revenue figure includes recognition of money deferred from a previous quarter for a Windows upgrade offer. Without that, revenue for the division still rose 11 percent.

Windows 7 sales continued to drive revenue, with more than 60 percent of desktop PCs today running that operating system, up from just more than 50 percent last quarter, Nelson said.

Overall, big businesses spurred double-digit growth in volume licensing for Windows.

“Enterprise is fine, but it’s going to come down to the adoption rate of Windows 8” among both businesses and consumers, said Michael Yoshikami, chief executive of money-management firm Destination Wealth Management. “They’ve licensed a lot of copies, but we don’t know how many of those copies are in consumers’ hands.”

In talking about Windows 8 in a conference call with analysts, Chief Financial Officer Peter Klein stressed that “its early days and an ambitious endeavor like this takes time.”

“We learned a lot this quarter” about what customers are looking for, he said, implying that the company would be working with manufacturers on varieties of form factors and on trying to lower prices of touch-screen Windows 8 devices.

Regarding the Surface tablet, which was launched in October, Klein offered no sales numbers, saying only that “this quarter, it was certainly a contributing factor to revenue growth in the Windows business. ... Our goal is to continue building that business.”

Sid Parakh, an analyst with McAdams Wright Ragen, said that by his own estimates Microsoft had sold about a million Surface units, adding that he had expected sales to be higher.

While Windows 8, out of the gate, hasn’t been the catalyst for PC and tablet sales that some had hoped for, the Windows division did “a little better than I expected,” said Todd Lowenstein, a vice president with HighMark Capital Management. It regained its crown as Microsoft’s top revenue generator.

“You want to see them executing well at the core, and it looked like the core delivered pretty good,” Lowenstein said. But “they still need to demonstrate to the Street that they can deliver outside of their core bread and butter.”

Business: $5.69 billion, down 10 percent from $6.31 billion last year.

Those results reflect a deferral of $788 million from Office presales and upgrade offers, in advance of the launch of Office 2013 and the new version of Office 365, expected this month.

Without those deferrals, divisional revenue rose 3 percent.

Consumer revenue declined 2 percent, but business revenue grew 4 percent (with multiyear licensing revenue growing 10 percent within that), said Chris Suh, Microsoft’s general manager of investor relations.

Exchange, SharePoint and Lync — key products of the division — collectively grew in double digits.

Server and Tools: $5.19 billion, up 9 percent from $4.77 billion last year.

This division continues to grow fast, with most of the growth coming from SQL Server and System Center.

Multiyear licensing revenue grew 17 percent.

Entertainment and Devices: $3.77 billion, down 11 percent from $4.24 billion last year.

Those figures include deferred revenue of $380 million from games people bought this quarter that also includes rights to receive additional content. Without that deferral, the division’s revenue fell 2 percent.

Suh did not break out numbers for Windows Phone, other than to say sales were four times higher than they were last year — something CEO Steve Ballmer had already asserted during the company’s annual shareholders meeting late last year.

Online Services: $869 million, up 11 percent from $784 million last year.

Revenue per search was “up significantly,” said Nelson, who declined to give figures on that.

The loss for the division was $283 million, compared with a $459 million loss last year.

Microsoft shares rose 2 cents Thursday to close at $27.63. In extended trading, after release of the quarterly report, the stock fell 40 cents to $27.23.

Janet I. Tu: 206-464-2272 or jtu@seattletimes.com. On Twitter @janettu.






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