Saturday 21 April 2018

Windows 7 fuels Microsoft growth

Dina Bass

Microsoft’s new Windows 7 software fueled a surge in profit and revenue last quarter, making up for a lingering slump in the rest of its business.

Second-quarter net income grew 60pc to $6.66bn beating the estimate of analysts surveyed by Bloomberg. Revenue climbed 14pc to $19bn, boosted by a rebound in personal-computer shipments.

Microsoft has sold more than 60 million Windows 7 copies since it debuted in October, making it the fastest-selling operating system ever.

Investors had anticipated the gains from Windows, limiting the stock’s reaction to the earnings, said Todd Lowenstein, a fund manager at Highmark Capital Management in Los Angeles. Microsoft also said that the recovery has been limited to consumers, not business customers.

“The positive Windows results were well advertised going into the quarter, so you really had to do a great job to make people happy,” said Lowenstein, whose firm manages $17bn, including Microsoft shares.

“In addition, you had a mixed message of ‘positive on consumer demand, but negative on enterprise.’ That may have disappointed people.”

Microsoft shares were little changed in late trading yesterday after the announcement. The stock, up 57pc last year, closed at $29.16 on the Nasdaq Stock Market.

Sales estimates

Analysts projected total sales of $17.9bn for the second quarter, which ended December 31. A year earlier, net income was $4.17bn on sales of $16.6bn. Three of Microsoft’s five units posted sales declines.

Windows revenue soared 70pc to $6.9bn last quarter. Heather Bellini, an analyst at ISI Group in New York, had projected sales of $6.6bn, while the average estimate of analysts was about $6bn, she said.

An improvement in corporate buying may come later this year, said Chief Financial Officer Peter Klein. Multiyear contracts with businesses are still taking a long time to complete, Klein said.

“What’s interesting is we were able to generate record revenue and profit on the backs of consumer demand,” he said in an interview. “We are not seeing the enterprise recovery yet. The timing of that recovery is uncertain.”

Revenue from Microsoft’s business division, which sells the Office software, declined 2.8pc to $4.75bn. Online services dropped 4.6pc, hurt by slow sales of Internet ads. The entertainment and devices unit, which makes the Xbox video-game machine, dropped as well.

Operating costs

Microsoft, which stopped giving earnings forecasts in January 2009, didn’t provide an outlook for profit and sales. Microsoft reiterated an October prediction of as much as $26.5bn in operating expenses this fiscal year.

The company may have disappointed some shareholders by keeping its cost forecast the same, said Katherine Egbert, an analyst at Jefferies & Co. in San Francisco, who recommends buying the shares.

“Unfortunately, there was some expectation they could lower operating expense guidance for the year,” she said. “Everything else looks good.”

Klein said the company left that forecast the same because Microsoft is sticking to the cost-cutting plan it already announced.

Even so, the cost of goods sold will be lower than previously forecast, he said. That’s because Microsoft found ways to produce the Xbox more cheaply, Klein said.

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