Microsoft's overall revenues for its fiscal first quarter, ended Sept. 30, were $16.01 billion, down 7.8% from the previous year and short of analysts' expectations of $16.42 billion. Net income was $4.47 billion, while earnings per share dipped 7.9% year-over-year, to 63 cents. Analysts polled by Thomson Reuters were, on average, expecting EPS of 68 cents.
"We saw the overall PC market decline this quarter in advance of the launch of Windows 8, and in part due to competitive pressures and the challenging macroeconomic climate," said Bill Koefoed, Microsoft's general manager for Investor Relations, during a conference call following the release of the company's earnings.
Revenues from Microsoft's Windows group fell 33% from the previous year, to $3.24 billion. But Koefoed noted that the results do not include pre-sales of Windows 8 and sales of Windows 7 PCs that are eligible for a $15 upgrade to Windows 8. The former accounted for $783 million in deferred revenue, while the latter resulted in deferred revenue of $384 million.
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Per SEC rules, the sales will be recorded in future quarters, after Microsoft delivers the software.
Koefoed also noted that the almost $800 million in Windows 8 pre-sales was 40% higher than pre-sales recorded by Windows 7, before it launched in the fall of 2009. Windows 8 is set for release on Oct. 26. "With a modern user interface, ability to support multiple form factors, and a rich platform to build apps, Windows 8 opens significant opportunities for partners, developers, and customers," said Koefoed.
He added that Windows 8 will drive synergies across Microsoft's product line, as it delivers a common code base for PCs and tablets, and is closely related to the forthcoming Windows Phone 8 mobile OS. "We have discontinued the bridge to the PC market, as Windows 8 will be a platform across a broad set of form factors."
Analysts said the challenge for Microsoft and partners will be to sell Windows 8 devices that can compete with low-cost, competitive devices like Android tablets and Amazon's Kindle Fire, while still being profitable. "We remain wary of potential pricing issues regarding the Windows 8 release," said Yun Kim, an analyst at ThinkEquity LLC, in a research note. Microsoft this week announced that the Windows RT version of its Surface tablet would start at $499.
Microsoft posted solid performance in some key areas. Revenue from its Server & Tools unit was up 8%, driven by strong sales of SQL Server, System Center, and developer tools. Online Services revenue was up 9%, helped by a 15% increase in advertising sales.
Revenue from Microsoft's Business Division, which derives mostly from Office, was down 2%, but the company deferred $189 million in sales due to a program that allows users to upgrade to Office 2013 when it ships early next year. Koefoed said Office 13 boasts "a fresh look and touch-friendly interface that lights up on Windows 8 devices."
Entertainment and Devices division revenues, mostly from Xbox, were off 1% in the typically slow pre-holiday quarter. Koefoed said he expects the unit to do well in the current quarter, which will see the launch of Halo 4 and other new Xbox titles.
Microsoft shares were down about 2%, to $28.90, in pre-market trading Friday.