Microsoft's Windows disappoints

Sales of Microsoft Corp's Windows software fell short of outsized expectations, rekindling fears that the spread of mobile gadgets will erode its main PC-focused business. Microsoft surprised Wall Street with a better-than-expected profit, helped by resurgent corporate spending after the belt-tightening of past years.
But its shares stayed flat as investors expressed concern about the weakness of overall computer sales amid a faltering US recovery. The world's largest software maker, whose Windows operating system runs on 90 percent of the world's computers, is heavily dependent on PC sales, which grew only 3 percent in the quarter. Now it is starting to feel the heat from investors eyeing the phenomenal take-up of Apple Inc's iPad.
"Outstanding numbers when you take a first look at it, but when you delve into them, Windows missed expectations by $300 million," said Brendan Barnicle, analyst at Pacific Crest Securities. Sales of smartphones and tablets are expected to grow much more quickly than PCs over the next few years, posing a threat to Microsoft's key market.
Microsoft stock is down about 3 percent over the past 12 months, compared with a 24 percent gain for the tech-heavy Nasdaq. Apple shares are up 65 percent over the same period. The results surprised the market after being discovered online by data search firm Selerity, which posted profit and revenue numbers on Twitter at 2:50 p.m. EST (1950 GMT).
Trading in Microsoft's shares spiked just under an hour later, after blogs and news agencies started reporting the earnings from the web page discovered by Selerity, sending the shares up as much as 2 percent to $29.46. They ebbed back to $28.87 at the close, a 0.3 percent gain for the day. They drifted slightly lower in after-hours trading.
Sales at its Office unit rose 24 percent to $6 billion, indicating that US businesses are starting to spend more on technology after the recession. Sales for its Windows unit fell 30 percent to $5.054 billion, a little short of analysts' expectations of about $5.3 billion, due to the lukewarm growth in PC sales. The year-ago figure was swollen by $1.71 billion in deferred revenue and pre-sales from the launch of Windows 7.
The perennially money-losing online services division, home of the Bing search engine, posted a 19 percent increase in sales, but saw its loss widen 17 percent to $543 million. The unit, which is making only slight headway against Google Inc, has lost more than $6 billion in the last five years. Unearned revenue - a measure of the strength of the business in Microsoft's pipeline - fell 9.5 percent to $13.4 billion, a cause of concern to some investors.
Microsoft reported overall fiscal second-quarter profit of $6.63 billion, or 77 cents per share, compared with $6.66 billion, or 74 cents per share, a year earlier. The per share figure was higher due to a reduction in shares outstanding from last year. Sales rose 5 percent to $19.95 billion, helped by strong sales of its Kinect hands-free gaming system and Xbox consoles, handily beating analysts' average estimate of $19.15 billion.
Microsoft now has $41.2 billion in cash and short-term investments on its balance sheet. Chief Financial Officer Peter Klein said he was happy with the cash it is distributing to shareholders, holding out little hope of a dividend hike, which some investors would like to see.