Microsoft's Q1 Figures Plummet As PC Market Splutters & the World Waits for Windows 8

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David Roe avatar

The financial earnings numbers keep piling up -- and after a week of poor performances, the closing bell in the stock exchange is beginning to sound a bit like a death knell. Last night, Microsoft released its figures for Q1, which fell by 22 percent on the same time last year as the PC market tries to pull out of a massive wobble.

Microsoft’s Windows 8

At this point, after looking at all the figures, the wobble is beginning to look like a terminal skid on the black ice of tablet sales. But with Windows 8 in the works for next week, Microsoft is hoping to get itself back on track.

While there are a lot of positives to be taken from the figures -- despite the fact that, in most business sectorsMicrosoft declined -- everyonewas focused on PCs. Specifically, they are wondering whether the Windows 8 OS will have enough umph-factor to create interest in a market that has gone tablet mad.

Indeed, most analysts suggest the timing of the Windows 8 release is a response to the growing popularity of tablets, since it includes new functionality that favors touch screens aimed at PC makers. Those PC makers are already talking up new ranges of laptops that will be able to double as tablets with detachable screens, or screens that fold down onto the keyboard. Is this where the Microsoft rebound will happen? Only time will tell.

Microsoft Q1

But returning to the figures; Microsoft was well below analysts’ expectations. Net earnings dropped by 22 percent, from US$ 5.74 billion this time last year, to US$ 4.47 billion for the quarter ending September 30 this year.

Revenues were US$ 16 billion, down 8 percent from US$ 17.4 billion in the same quarter last year. Revenues from Windows declined 33 percent to US$ 3.24 billion  -- though if Microsoft had not deferred revenue related to Windows 8, that decline would be only 9 percent

Even the lucrative business applications division that develops and sells Microsoft Office products, which would normallybe sustained by a buoyant PC market, declined by 2 percent, to US$ 5.5 billion in this quarter.

The Server & Tools business reported US$ 4.55 billion in first-quarter revenue, an 8 percent increase from the prior year period, driven by double-digit revenue growth in SQL Server sales and more than 20 percent growth in System Center revenue. This was also helped by the release of Windows Server 2012.

Standing back and looking at the numbers as a whole, they are in keeping with the figures of other major players in the market. IBM, which also reported earnings this week missed out on analysts’ expectations.

Microsoft’s PC Market

But for Microsoft, the real issue is how the PC market is going to hold up in the coming months and whether Windows 8 is going to help it pull it out of the doldrums.

The company is betting hard on this release -- the biggest software product from Microsoft in years -- with a US$ 1 billion global advertising campaign (already underway in the US) to counter act any negative feelings users may have about changes in Windows 8.

Learning Opportunities

In fact, for this quarter Microsoft is using Windows 8 to explain many of its ills, which sounds a bit like placing too many eggs in the same basket.

While enterprise revenue continued to grow and we managed our expenses, the slowdown in PC demand ahead of the Windows 8 launch resulted in a decline in operating income. Multi-year licensing revenue grew double-digits across Windows, Server & Tools, and Microsoft Business Division products as businesses commit to our technology roadmap,”said Peter Klein, chief financial officer at Microsoft.

However, while Klein said that they had recorded strong sales in the corporate sector, he also said the company’s results suffered because of “challenges in the PC environment,” especially the consumer market.

He added that OEMs were also winding down their Windows 7 inventory as they began to transition to Windows 8.

To counter issues in the PC market, Microsoft is introducing its Surface tablet at the end of the month,which will go on sale for afor starting price of US$ 500. While the company has high hopes for Surface, the tablet will be based on the Windows Phone operating system, which has yet to make a major impact onthe mobile market.

In the meantime, Apple continues its inimitable way with figures, suggesting it has doubled sales of iPad every year since its launch. This translates into 17 million iPads in the April-June period alone.

Microsoft’s Future Quarters

But these are not the only problems Microsoft is facing -- and by its own admission, next year is going to be difficult. In a statement around its Q1 earnings, it issued the usual warning that the figures it has just released are subject to “current expectations” but that these could change depending on a number of factors. Even a sample of the factors that it lists is telling. It includes (and here we will quote them verbatim):

  • Intense competition in all of Microsoft’s markets
  • Execution and competitive risks in transitioning to cloud-based computing
  • Microsoft’s continued ability to protect its intellectual property rights
  • Claims that Microsoft has infringed on the intellectual property rights of others
  • The possibility of unauthorized disclosure of significant portions of Microsoft’s source code
  • Improper disclosure of personal data that could result in liability and harm to Microsoft’s reputation
  • Outages and disruptions of services provided to customers directly or through third parties

Most of the other large IT companies could reasonably cite the same list of possible issues. But for Microsoft, dealing with the current state of the PC market, it could be a while before there is a substantial improvement in the company's fortunes.