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Microsoft beats expectations but Xbox slipping

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Microsoft beat Wall Street's profit forecast as personal computer sales held up better than expected, and Windows sales defied decline predictions.

The results buoyed optimism around the world's largest software maker which is lining up Windows 8, a new tablet-friendly version of Windows, for later this year and is looking to make a dent into Apple and Google domination of the mobile market this holiday shopping season.

"The results were a fair amount better than we were looking for," said Rick Sherlund, an analyst at Nomura Securities. "Overall revenue growth was 6 per cent, and this is before the new product cycle, which should come around October."

Microsoft has not said when Windows 8 will be released, but most in the industry expect it on devices from around October, offering an alternative to Apple's runaway iPad. New Windows smartphone software is expected around the same time.

"Next year at this time we should be talking about Windows 8 mobile and how it's contributing or not to the company," said Kim Forrest, analyst at Fort Pitt Capital Group. "But we really need Windows 8 to come out on all devices, to see if it's going to have that synergy or not."

The Redmond, Washington-based company reported fiscal third-quarter profit of $US5.11 billion. Sales rose 6 per cent to $US17.41 billion, driven by strong demand for its server software products and Office application. Analysts had expected sales of $US17.18 billion.


Worldwide PC sales rose a modest 1.9 per cent in the quarter, according to tech research firm Gartner. That was better than expected in a market facing hard-drive shortages from Thailand and the onslaught of Apple's iPad.

That helped Microsoft, which supplies the operating system for 90 per cent of PCs, to post a 4 per cent increase in sales of Windows, still its main product.

"The Windows beat was a positive surprise, looking at about 4 per cent growth, versus expectations for about a 4 per cent decline," said Josh Olson, an analyst at Edward Jones.

"We also had solid business and server performance as well. The Big Three, if you will, in terms of the revenue drivers, were all a little bit better than expected, with Windows a lot better than expected."

On the downside, Microsoft's usually profitable entertainment and devices unit posted a quarterly loss due to falling sales of its aging Xbox game  console and increased research and marketing costs for its new Windows Phone software.

"There was weakness in entertainment and devices," said Sid Parakh, an analyst at McAdams Wright Ragen. "If that were to have come in in-line, it would have been a pretty nice beat."

Traditional console sales are down across the board this year - hurting Microsoft, Sony and Nintendo - as the iPad and other tablets grab a slice of the lucrative market.

Microsoft shares are up 20 per cent so far this year, but are still the cheapest of the big tech stocks and still below levels of 10 years ago, as investors worry about the company's ability to match Apple and

in online and mobile technology. Apple's market value is now comfortably twice that of Microsoft, with sales of iPhones last quarter exceeding Microsoft's overall revenue.


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