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Microsoft to AMD Follow Intel Suffering From PC Weakness

Published: October 19, 2012 | 6:35 am
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Microsoft (MSFT) Corp. and Advanced Micro Devices Inc. (AMD) reported quarterly results yesterday that fell short of analysts’ predictions, adding to evidence that personal-computer sales are being squeezed by anemic demand and competition from tablets.
Microsoft, the largest software maker, released profit and sales in the first fiscal quarter that missed estimates on declining sales of Windows, its flagship operating system. AMD, the No. 2 maker of PC processors, forecast sales in the last three months of 2012 that may miss projections and said it will cut 15 percent of staff.

Following Intel Corp. (INTC)’s results earlier in the week showing margins under pressure, yesterday’s reports underscored the impact of global economic weakness and a shift away from traditional computers toward handheld electronics. Some customers also put off PC purchases before the debut of the next version of Microsoft’s flagship Windows operating system.
“I don’t think people are expecting a big bounce in terms of PC sales for the fourth quarter,” said Colin Gillis, an analyst at BGC Partners LP in New York.
Shares of Redmond, Washington-based Microsoft fell 1.6 percent to $29.01 in extended trading yesterday after the report. They had dropped 2.7 percent in the three months through the end of September, compared with a 5.8 percent increase for the Standard and Poor’s 500 Index.
Sunnyvale, California-based AMD — the worst performer on the Philadelphia Semiconductor Index this year, with a decline of 51 percent — slumped 5.4 percent to $2.62 at yesterday’s close in New York.

Weak Windows

Microsoft’s net income declined 22 percent to $4.47 billion, or 53 cents a share, in the three months through Sept. 30, it said in a statement. That missed the 56-cent average estimate of analysts polled by Bloomberg. Sales fell 7.9 percent to $16 billion, compared with the $16.4 billion average estimate.
During the quarter, global PC shipments slumped 8.3 percent from a year earlier to 87.5 million units, market-research firm Gartner Inc. said last week. The total PC market will contract by 1.2 percent to 348.7 million units this year, according to IHS ISuppli. That’s the first annual decline since 2001, the market researcher said last week.
Although holiday sales usually kick in this time of year, AMD is expecting revenue to fall 9 percent, plus or minus 4 percent, in the current quarter from the prior period, the company said yesterday in a statement. That indicates sales as low as $1.1 billion, compared with an average analyst estimate of $1.31 billion, according to data compiled by Bloomberg.

Big Bet

Microsoft is betting on Windows 8, which goes on sale next week, to lift demand for PCs and get consumers to purchase tablet machines running Windows rather than Apple Inc. (AAPL)’s iOS or Google Inc. (GOOG)’s Android. Alongside tablets from its computer-maker partners, Microsoft will begin selling Surface, a tablet machine that marks the company’s first foray into computer hardware.
Sales of Windows declined 33 percent to $3.24 billion, missing the average analyst estimate of $3.64 billion. Business Division sales, mostly Office software, fell 2.4 percent. Microsoft is betting on Windows 8 to vault it into the tablet market and restore consumer demand.
“The Microsoft numbers are a little worse than expected, but for Wall Street, it’s all about Windows 8,” said Mark Moerdler, an analyst at Sanford C. Bernstein & Co. “These are not substantially off enough to change the fact that people are largely going to shrug it off and look towards the launch of Windows 8 to see how that goes.”

Deferred Revenue

Multiyear contracts, which Microsoft reports as unearned revenue, blunted the impact in the latest quarter and boosted investor optimism for future quarters. Demand from corporate customers upgrading their server software and paying off multiyear contracts translated into unearned revenue, a measure of future sales, of $19.6 billion. That’s better than analysts’ average estimate of $19.3 billion, according to data compiled by Bloomberg.
Although corporate PC purchases, which have been shoring up results for the last several quarters, have slowed, they have performed better than the consumer market, Microsoft Chief Financial Officer Peter Klein said in an interview.
Microsoft said a weaker economy, particularly in Europe, is causing companies to put off one-time purchases of its software. At the same time, corporate customers continue to sign multiyear agreements, with such licenses rising 15 percent in the quarter, he said.


Poor PC demand and the shift to tablet machines has been ailing Microsoft’s Windows unit for almost two years. Windows revenue has fallen short of analysts’ estimates in six of the last eight quarters.
Klein declined in an interview and conference call to provide an outlook for Windows sales in the current quarter and full year. He also didn’t adjust the cost of goods sold numbers to account for Surface, explaining to analysts that the company will just see how the device sells first.
Server unit sales rose 8 percent to $4.55 billion. Although Xbox division sales declined slightly to $1.95 billion, they beat the average analysts’ estimate of $1.62 billion, as Xbox remained the top-selling console in the U.S.
The online business saw sales increase 8.7 percent to $697 million, while analysts had expected an average of $689 million, as the company boosted average revenue per search. Microsoft also narrowed the loss in that unit to $364 million.


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