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Microsoft's software license sales miss estimates

Tuesday, January 27, 2015 - 07:44
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Microsoft Corp.'s software license sales to businesses fell short of analysts' estimates in the fiscal second quarter, hurt by weak sales in Japan and China.

[SEATTLE] Microsoft Corp.'s software license sales to businesses fell short of analysts' estimates in the fiscal second quarter, hurt by weak sales in Japan and China.

Commercial licensing revenue fell to US$10.7 billion (S$14.4 billion) in the period that ended Dec 31, the world's largest software maker said on Monday in a statement.

Analysts on average had projected US$10.9 billion, based on a survey conducted by Bloomberg. Unearned revenue, a measure of future sales, was US$21.2 billion, compared with estimates of US$21.8 billion. The stock slipped 3 per cent in extended trading.

As Satya Nadella approaches his first anniversary as chief executive officer, Microsoft's traditional business-software unit is being hurt as customers switch from licensed programs to its Internet-based products, and as a corporate push to replace Windows XP tapers off.

The disappointing sales in the company's biggest division marred a quarter in which total sales topped estimates, helped by strong growth in its cloud software and Xbox video-game console.

"Even though they beat on consumer and devices, it was a slight miss on the commercial side," said Daniel Ives, an analyst at FBR Capital Markets & Co. "That gives you a B-plus quarter where some investors were looking for an A-minus."

Xbox sales and the shift to cloud products are also pinching margins, the Redmond, Washington-based company said. Gross margin, or the percentage of sales left after subtracting production costs, was 61.7 per cent, while analysts were looking for 62.9 per cent, on average, Mr Ives said.

"Where there are execution issues, we will address them," Mr Nadella said on a conference call to discuss results. "Where there are macroeconomic issues, we will weather them."

Second Quarter Profit excluding certain costs in the second quarter was 77 cents a share. Revenue rose 8 per cent to US$26.5 billion, the company said Monday in a statement. Analysts on average projected profit of 75 cents on sales of US$26.3 billion, according to data compiled by Bloomberg.

Microsoft chief financial officer Amy Hood said commercial numbers were hurt by lackluster demand in China and Japan, as well as currency effects stemming from a weaker euro against the US dollar.

Windows revenue from personal-computer makers who buy the operating system to put on their machines fell 13 per cent in both the commercial and consumer businesses. On the commercial side, demand dropped off from a year ago, when corporations rushed to upgrade because Microsoft was ending support for Windows XP. Consumers are buying cheaper machines, hurting Windows sales.

"We feel good overall about the health of the commercial business," Hood said in an interview. "The specific weakness we saw is China, Japan and some headwinds from FX."

Net income including charges related to Microsoft's biggest-ever round of job cuts, which began in July, and 4 cents a share of income- tax expense, the company reported second-quarter net income of US$5.86 billion, or 71 cents a share.

Mr Nadella implemented the plan to reduce costs after Microsoft completed its 5.44 billion-euro acquisition of Nokia's mobile-phone business, and as part of an effort to streamline operations and software development at the company.

Mr Hood, who will give a more detailed forecast on the conference call, said she expects currency fluctuations, as well as demand in Russia, China and Japan, to persist as challenges for the rest of the fiscal year.

The stock climbed 24 per cent last year, buoyed by optimism for Mr Nadella's plan to focus on Web-based software and services to lessen the company's reliance on the slumping PC market. The gain compared with an increase of 11 per cent in the Standard & Poor's 500 Index.

While commercial licensing revenue fell short, sales of cloud programs for corporations more than doubled, the company said today, and the business now has a revenue run-rate of US$5.5 billion on an annualised basis.

Microsoft has been boosting sales of its Azure cloud software and Web-based versions of its work-productivity programs, called Office 365.

A price cut and new games also jump-started ailing demand for Xbox One, which was the top selling video-game console in the US for the holiday season. The company said it sold 6.6 million Xboxes in the recent period.

The company is trying to increase revenue against the backdrop of a three-year slump in the PC market, where a recent stabilization now looks to be losing steam.

Worldwide PC shipments fell 2.4 per cent in the fourth quarter, according to market-research firm IDC, as demand for new machines from business waned and consumer interest failed to pick up.

MOBILE DEVICES

As PC sales have foundered, Microsoft has failed to make up for the slump by gaining a foothold in phones and tablets - Windows was installed on 11 per cent of all devices shipped in 2014, according to a Sanford C. Bernstein & Co. analysis. That's because PCs accounted for only about 10 per cent of computing devices last year.

Mr Nadella last week sought to give Microsoft's Windows operating system a shot in the arm. The company held a full-day event to preview the next version of the software, Windows 10, which features a new browser to replace Internet Explorer and free upgrades for many current Windows users. With an eye on the future, the company also demonstrated a holographic headset and said Windows 10 will include programming interfaces and tie-in applications using holograms for business and personal use, such as in architecture, surgery and gaming.

"The business is going through a transition, and Windows 10 is part of that," said Mark Moerdler, an analyst at Sanford C. Bernstein, who rates the shares the equivalent of buy.

"They are going to have to find ways to monetize." While Windows was the star last week, Mr Nadella has been guiding the company toward Web-based and mobile products. Microsoft's corporate cloud revenue has been more than doubling the past few quarters, as its Azure line of products and services lures more customers from Amazon.com Inc.'s Web Services unit, and as the Office 365 Web-based productivity software adds new apps for Apple Inc.'s iPads and iPhones and devices based on Google Inc.'s Android software.

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