Microsoft 1Q13 earnings: strong enterprise division fails to offset slow PC market

Microsoft logoMicrosoft's revenue and profit for the first quarter of its 2013 financial year were down year on year, with the company attributing the weaker performance to slowdowns in the PC market in the run up to Windows 8's availability.

Revenue was down eight percent to $16.008 billion. Operating income dropped 26 percent to $5.308 billion, and earnings per share fell 22 percent to $0.53. Part of the weak performance is attributed revenue for Windows 8 and Office 2013 that's deferred until the software actually ships (October 26 and the first quarter of calendar year 2013, respectively). With that revenue included, revenue was flat, at $17.364 billion, operating income down seven percent to $6.664 billion, and earnings per share down four percent to $0.65.

The Windows and Windows Live Division bore the brunt of the PC slowdown. Revenue was down nine percent year-on-year to $4.411 billion. Of this, $3.244 billion was booked this quarter; $1.167 billion is deferred until delivery of Windows 8. This is at the top end of Microsoft's deferral estimate of $1.0-$1.2 billion last quarter. Operating income was accordingly down 50 percent to $1.646 billion.

Although volume license revenue grew by double digits, the drop in transactional revenue—which is to say, people buying new PCs with Windows preinstalled—is a reflection of the broader malaise in the PC market. Microsoft says this is in anticipation of the release of Windows 8. The company notes Windows 8 pre-sales revenue, the $1.167 billion that hasn't been booked yet, is up 40 percent relative to Windows 7. This suggests there's some amount of pent up demand.

Microsoft Business Division also suffered a little from the decline in the PC market. Its revenue was up just one percent to $5.691 billion. Again the division has some deferrals; $5.502 billion was booked this quarter, $189 million is deferred until Office 2013 is delivered. Operating income was down two percent to $3.646 billion. Multi-year enterprise licensing revenue grew by eight percent, Dynamics CRM revenue was up by more than 30 percent, and Exchange, SharePoint, and Lync together grew by double digits.

Server and Tools, which is less dependent on the broader PC market, had a much stronger quarter. Revenue was up eight percent to $4.552 billion, and operating income up 12 percent to $1,748 million. Multi-year licensing revenue grew 19 percent, SQL Server Premium revenue was up more than 20 percent, and the System Center range also increased revenue by more than 20 percent.

The perennially loss-making Online Services Division also showed improvement. Revenue was up almost nine percent to $697 million, and the operating loss was down 29 percent, to $364 million. Online advertising revenue grew by 15 percent, and Bing increased its US market share by 1.2 percent year on year.

Entertainment and Devices Division saw a 1 percent decrease in revenue to $1.946 billion, with operating income down sharply; a 94 percent drop, to just $19 million. In the quarter some 1.7 million Xbox consoles were sold, down 29 percent on the same time period last year. This still leads the US market, with a 49 percent share in September.

Looking forward, next quarter will start to see the recognition of the deferred Windows 8 revenue, with Microsoft expecting that $800 million of the deferrals will be booked. The remainder will be booked throughout the second half of its FY 2013. Conversely, the company expects to defer about $850-$950 million of Office revenue as a result of Office 2013 pre-sales and upgrade offers. Multi-year Microsoft Business Division revenue (60 percent of total) is expected to grow in the low double digits; transactional revenue by low single digits.

Server and Tools expects product revenue (80 percent of total) to grow by high single digits, and enterprise services revenue by low double digits. Online Services Division anticipates continued revenue growth similar to that of first quarter.

Entertainment and Devices Division expects a revenue decline of the low teens. Second quarter is historically the division's biggest, due to Christmas. The soft market is likely a reflection of Xbox 360's relative age. In spite of this, whole fiscal year revenue is still expected to be up on 2012.

Source: Ars Technica

Tags: Microsoft, report

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