Last updated: October 21, 2011 12:10 am

Microsoft reports modest gains

Microsoft’s quarterly profit increased by a modest 6 per cent from a year earlier as sales of its flagship Windows operating system were depressed by flagging growth in the PC industry.

The world’s largest software company by revenues said sales in the fiscal first quarter rose 7 per cent to $17.37bn, held back by a mere 2 per cent gain on Windows to $4.87bn. The division including Office software grew by 8 per cent to $5.62bn.

Overall profit reached $5.74bn, or 68 cents a share, marking the first time in more than a year that Microsoft had not beaten the average Wall Street estimate.

“Our product portfolio is performing well, and we’ve got an impressive pipeline of products and services that positions us well for future growth,” said Peter Klein, chief financial officer.

Growth in PC sales has slipped in the uncertain economy, in part as consumers choose smartphones and tablets instead. But earlier this week, Apple too failed to top expectations as iPhone shipments missed forecasts.

Microsoft shares fell in after-hours trading after closing at $27.04, but recovered to $26.86, off less than 1 per cent.

In addition to soft PC sales, Microsoft was hurt by having a greater proportion of sales in emerging markets, where margins are thinner.

Business computers are selling faster, up 5 per cent in the quarter as consumer PCs were flat, Microsoft said, with total shipments rising between 1 and 3 per cent. Stripped-down netbooks are among the devices most often replaced by tablets.

But executives said the quarter just begun would have strong holiday offerings including more powerful “ultrabook” portables and Xbox game consoles enhanced by new mainstream content offerings.

Mr Klein also talked up Microsoft’s smartphone prospects, including partnerships with Samsung and Nokia, which he said help make Microsoft’s the third most-used mobile operating system after Apple and Google’s Android.

Microsoft continued to lose money in its online services, though the losses narrowed from a year earlier’s $558m to $494m. Online ad revenue increased 21 per cent, and Microsoft said it remained dedicated to improving the monetisation of its search agreement with Yahoo.

Yahoo is undergoing a strategic review, which may end in a sale of all or some of the internet media company.

Steve Ballmer, Microsoft chief executive, said this week that the company had been “lucky” not to buy Yahoo when it tried three years ago at more than double Yahoo’s current market capitalisation.

However, it may still end up in an alliance with one or more private equity firms interested in bidding for Yahoo, people familiar with the process said. A Microsoft spokesman declined to comment.

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