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Microsoft reports low Q1 earnings on sluggish PC sales

Everyone's waiting for Windows 8 – they hope

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Microsoft had an unremarkable quarter during the three months ending September 30, with a soft PC market contributing to low earnings in advance of a raft of highly anticipated Redmond product launches that will begin later this year and continue through 2013.

On Thursday, the software giant posted a profit of $4.47bn on revenues of $16bn for Q1 of its fiscal 2013 – not great compared to the $5.74bn profit it brought in during the same period the previous year, but certainly better than the $192m loss it reported for Q4 of 2012.

Both earnings and revenue were slightly lower than the 28 analysts polled by Yahoo! Finance had been hoping for, with the group predicting $16.42bn in revenue and $4.72bn in profits, on average.

But although the quarter was nothing to crow about, Microsoft offered no real shocks, either. In a refrain that's becoming all too familiar among top IT vendors, it blamed some of its earnings slump on slow sales in the global PC market. Redmond execs, however, said they expect that trend to start to reverse in the coming quarter, particularly in light of the impending launches of Windows 8 and Surface on October 26.

"We've already certified more than 1,000 systems for Windows 8 from our hardware partners, ranging from the smallest tablets and convertibles to touch-enabled ultrabooks and all-in-ones to the most powerful desktop computers," Microsoft COO Kevin Turner said in a statement announcing the company's earnings.

That's fine for next quarter, but Windows sales remained slow throughout Q1. Microsoft reported just $3.24bn in revenues for its Windows and Windows Live Division, a dizzying 33 per cent decline from the previous year's figure.

But that number didn't take into account an additional $800m in revenue from early Windows 8 upgrade sales and presales to OEMs, which Redmond won't be able to realize until the new OS actually ships next quarter. When adjusted for that deferred income, the Windows group's revenue was only down 9 per cent – again, not great, but not really surprising, given the current market climate.

During a conference call with financial analysts, Microsoft CFO Peter Klein said those Windows 8 presale figures were 40 per cent stronger than they were during the equivalent quarter prior to the Windows 7 launch.

The Windows group aside, earnings for Microsoft's other divisions were either essentially flat or showed modest growth. Profits were generally down, however, particularly in the Entertainment and Devices Division, which saw its operating income drop a whopping 94 per cent to land at just $19m on sagging Xbox sales.

It should come as no surprise, either, that Microsoft's perennially lossmaking Online Services Division, which operates the Bing search engine, remains in the red. It lost only $364m this quarter, though, improving on the $514m it bled during last year's Q1.

One bright spot was the Server and Tools Division, which actually brought in more income than Windows and Windows Live for the first time in Microsoft's history. Klein attributed some of that strength to increased sales of multi-year licensing contracts to enterprise customers, which he said were up 15 per cent.

Looking forward, however, everything depends on a successful launch of Windows 8, followed by a series of staggered product releases throughout 2013, not least of which will be the launch of Office 2013 early in the year.

"We have kicked off the largest launch wave in our history, and in a twelve-month period we will have refreshed almost all of our products," Klein said. Now Microsoft just needs people to buy them. ®

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