Microsoft Posts 30% Profit Increase, but Sales of Windows Are Weak

@nytimesThe New York Times

Microsoft Posts 30% Profit Increase, but Sales of Windows Are Weak

SAN FRANCISCO — Microsoft reported weak sales of its core operating system on Thursday while its entertainment products thrived.

Microsoft is trying to overcome muted demand for computers caused by the increasing demand for tablets, which do not run on Microsoft software. Sales of the company’s Windows operating system are closely tied to PC shipments, which grew only modestly in the last quarter.

Microsoft’s reported that net income in the fiscal fourth quarter, which ended in June, rose 30 percent to $5.87 billion, or 69 cents a share, from $4.52 billion, or 51 cents, in the year-ago quarter.

The company said revenue climbed 8.5 percent, to $17.37 billion from $16 billion.

The net income was above the expectations of Wall Street analysts. They had expected 58 cents a share and revenue of $17.25 billion, according to a survey of analysts by Thomson Reuters.

“We continue to see strong business demand across all of our products, from small businesses all the way up to the largest global enterprises,” said Kevin Turner, the company‘s chief operating officer, in a news release. “Throughout fiscal 2011, we delivered to market a strong lineup of products and services, which translated into double-digit revenue growth and operating margin expansion,” said Peter Klein, chief financial officer at Microsoft.

Revenue from the unit that sells the Windows operating system software fell 1 percent, to $4.74 billion. The division’s fortunes are tied closely to PC sales, which worldwide grew 2.6 percent in the quarter, according to IDC, the market research firm.

A shift by consumers to tablets, mostly Apple’s iPad, is partly to blame. The limited appetite for computers is worrisome to Microsoft because most tablets run on Apple’s operating system or Google’s Android.

Tablet manufacturers have shown little interest in adopting Windows, leaving Microsoft out of what is turning into far more than a niche product. Sales of tablets are expected to triple to 43.6 million in 2011 from a year earlier, according to eMarketer, a market research firm.

Meanwhile, Microsoft is also struggling with getting its Windows Phone 7 operating system on smartphones. Earlier this year, Nokia agreed to make phones that use Windows, but the partners have yet to introduce any devices.

In an ominous sign, Nokia said on Thursday that its smartphone sales fell 32 percent in the quarter. The decline shows eroding demand for Nokia’s products and the difficulty Microsoft faces in using them as a stepping stone to compete against the Apple iPhone and Google Android phones.

The company still has strengths. Revenue from its Office software, which includes Word, grew 7 percent, to $5.78 billion. The company has said that the latest version, Office 2010, is its fastest-selling version ever.

Revenue from servers and tools, a division focused on corporate products, grew 12 percent to $4.64 billion.

A particular bright spot in Microsoft’s portfolio was its entertainment products and devices like the Xbox 360 video game console and the Kinect game controller, which lets users move their bodies to control characters in video games. Sales by the division grew 30 percent, to $1.49 billion.

Revenue from Microsoft’s online properties, like the MSN portal and Bing search engine, rose 17 percent, to $622 million. The unit posted $728 million in operating loss, continuing a streak of red ink.

Microsoft took over Yahoo’s search engine in an effort to better compete with Google. But so far, the partnership has failed to lift online advertising revenue as much as executives originally told investors.

Shares of Microsoft rose just over 1 percent to $27.43 in after-hours trading. In regular trading, they closed nearly flat at $27.10.

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