* Sales up 13 pct to $16.4 bln, but mainstay Windows drops
* Office, Xbox sales up sharply, online loss widens
* CFO sees business PC market stronger than consumer
* Shares slide 1.2 pct
(Adds sales breakdown by unit)
By Bill Rigby
SEATTLE, April 28 Microsoft Corp (MSFT.O)
reported a dip in quarterly sales of its core Windows operating
system, mirroring a recent downturn in personal computers and
sending its shares down slightly.
The world's largest software company met Wall Street profit
estimates after strong sales of its Office suite of
applications and Xbox game systems took up the slack.
But its stock has waned in past weeks, spooked by a dip in
PC sales -- which generate most of its revenue -- and by fears
the Apple Inc (AAPL.O) iPad and other mobile devices will
eventually erode the PC business.
Microsoft's shares fell 1.2 percent to $26.37 in
after-hours trading following the earnings report on Thursday.
"Microsoft to me is no longer a growth stock, but it is a
very attractive value stock. They continue to generate
tremendous free cash flow. Their balance sheet is really
unmatched," said Channing Smith, co-manager of the Capital
Advisors Growth Fund.
"What you will begin to see is a shift away from growth
investors. You are seeing that transition where Microsoft is in
no man's land, but I think they will become increasingly more
attractive to value investors."
Microsoft has sold a record-breaking 350 million licenses
for its Windows 7 operating system since launching it 18 months
ago, but demand appears to be waning in an uncertain economy.
PC sales -- the engine guiding Microsoft's financial
success -- fell 1 percent in the first three months of the
year, according to one research firm. [ID:nN13301394]
CFO Peter Klein told Reuters in a phone interview the
company expects corporate spending on PCs to outpace consumer
PC sales through the next 12 months. He acknowledged that sales
of low-end netbooks were suffering particularly, partly because
of the success of tablets and other mobile devices.
"The concern is PC markets are being disrupted. There's
some validity," said BGC Financial analyst Colin Gillis. "But
it's also overblown when you factor in that Windows 7 is the
fastest-selling OS in history."
<Graphic showing share performance:
Graphic on Tech, telecoms earnings:
CAN DO WRONG?
The company co-founded by billionaire Bill Gates has
exceeded Wall Street's expectations in seven straight quarters
-- but its stock remains at 2001 levels. Investors fear that
new gadgets, led by the iPad, are the thin end of the wedge
that will one day separate Microsoft from its core customers.
Microsoft shares are down 14 percent over the past 12
months, compared with a 16 percent gain in the Nasdaq.
Longer term, some see the new devices as unleashing a genie
that Microsoft may never be able to put back in the bottle.
Microsoft notched a 31 percent increase in fiscal
third-quarter net profit, reporting $5.2 billion, or 61 cents
per share, compared with $4 billion, or 45 cents per share, in
the year-ago quarter. Five cents per share of that profit was
attributed to a one-time tax benefit.
Excluding the tax benefit, profit met the 56 cents expected
by Wall Street analysts, according to Thomson Reuters I/B/E/S.
Despite the dip in the Windows unit, overall sales rose 13
percent to $16.4 billion, ahead of the $16.2 billion expected
by analysts, helped by sales of Office and its Xbox game system
and Kinect add-on.
Sales at its Windows unit fell 4 percent to $4.4 billion,
but that was offset by a 21 percent increase at the Office unit
to $5.2 billion, as people continued to buy copies of the new
Office 2010, released last year.
The entertainment and devices unit -- which makes the Xbox
and phone software -- posted a 60 percent increase in sales to
$1.9 billion, mostly due to the success of the Kinect
motion-sensor, launched last November.
The online services unit, which runs the Bing search engine
and MSN web portal, raised revenue 14 percent to $648 million,
but it still made a loss of $726 million in the quarter as
Microsoft continued to step up efforts to challenge Google Inc
(GOOG.O) in Internet search. The unit has now lost $7 billion
in four years.
Microsoft said its agreement to power Yahoo Inc (YHOO.O)
Internet searches by Bing was still not bringing the results it
had hoped for, with revenue per search below expectations. That
echoed similar remarks by Yahoo last week. [ID:nN18239254]
Microsoft stock is now trading at 9.6 times expected
earnings for the next 12 months. That is half the stock's
10-year average and below the 13 times average for major tech
Even its 2.5 percent dividend yield, which lags only Intel
Corp's (INTC.O) among big tech, is not enough to persuade
investors to change their outlook.
"The question to ask is: is there any product line in
Microsoft that they are not playing catch-up on?" asked Trip
Chowdhry at Global Equities Research
(Editing by Gary Hill, Bernard Orr)