Friday, April 29, 2011

Microsoft Profit Falls Below Apple’s After IPad Eats Into Windows Revenue

Microsoft Corp. (MSFT)’s Windows sales slumped last quarter as the iPad crimped demand for consumer laptops, marking the first time in 20 years that the software maker reported a smaller quarterly profit than Apple Inc. (AAPL)

Revenue in Microsoft’s Windows division fell 4.4 percent to $4.45 billion, the Redmond, Washington-based company said yesterday in a statement. That missed the $4.6 billion average prediction of analysts surveyed by Bloomberg. Net income was $5.23 billion, eclipsed by the $5.99 billion reported by Apple last quarter.

Consumer PC shipments dropped 8 percent in the quarter, Microsoft Chief Financial Officer Peter Klein said. Netbooks -- the cheap laptops that became popular during the recession -- plunged 40 percent, partially because of defections to tablet computers, he said. The decline overshadowed a better-than- anticipated performance from Microsoft’s Office unit and increased PC demand from corporations.

“You have to live underneath a rock not to know that the iPad has taken share from the netbook,” said Pat Becker Jr., principal of Portland, Oregon-based Becker Capital Management Inc., which holds Microsoft shares as part of its $2.5 billion in assets. “It’s a problem on the consumer side, and that’s a market where Microsoft continues to give up territory to Apple.”

Microsoft fell 1.6 percent to the equivalent of $26.37 at 11:29 a.m. in German trading. The stock declined as much as 74 cents in late U.S. trading yesterday after the report. The shares, down 4.3 percent this year, had closed at $26.71 on the Nasdaq Stock Market.

Less Than Apple

Net income rose to 61 cents a share, from $4.01 billion, or 45 cents, Microsoft said yesterday. Excluding a 5-cent per-share tax benefit, earnings matched the 56-cent average of estimates compiled by Bloomberg.

The results underscore the ascendance of Apple, which surpassed Microsoft as the world’s most valuable technology company last May. The last time Apple’s profit was bigger than Microsoft’s was 1991.

While PC shipments to corporate customers rose 9 percent, tablet competition accounted for some of the sluggishness in consumer sales, Klein said in an interview.

“It’s fair to say tablet is some of that,” he said.

Total PC sales declined 2 percent last quarter, Microsoft said. That the Windows business performed even worse adds to the concern over Microsoft’s performance, said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland.

Office Sales

“That’s suggesting some market share loss, some real deterioration,” said Barnicle, who rates Microsoft’s stock “sector perform.”

Microsoft’s overall sales rose to $16.4 billion, compared with the $16.2 billion average projection. That reflected demand for such products as Office business-productivity software and programs for servers -- the computers that run networks.

“We are seeing businesses invest in technology,” Klein said. “They are buying hardware and they are buying Microsoft software.” Microsoft expects corporate PC shipments to outpace consumer sales for the rest of the year.

Sales in the business division, which sells Office software and is the company’s biggest unit, rose 21 percent to $5.25 billion, compared with the $4.9 billion average estimate of analysts. Revenue at the Server and Tools unit was $4.1 billion, compared with the $4 billion analysts projected.

“There is a tale of two cities going on here,” said Brent Thill, an analyst at UBS AG in San Francisco, who recommends buying Microsoft shares. “You have consumers who say an iPad is good enough for consuming data, but for the enterprise side, those enterprises are continuing with Microsoft. The thing that has hurt Microsoft is that tablets are no question the must-have item for consumers.”

Source: Bloomberg - By Dina Bass - Apr 29, 2011 5:33 AM ET

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