MS Windows sales fizzle as tablets dominate market

SEATTLE (Reuters) - Sales of Microsoft Corp's flagship Windows software disappointed for the third straight quarter, taking the gloss off better-than-expected earnings that were aided by an unusually low tax rate.

The results failed to excite a market already wary about growth prospects for the company and PC industry as netbook sales give way to tablets. The stock was flat in after-hours trading.

"All eyes are on Windows and how they are ultimately going to extend this franchise in the future, as the PC business continues to lose share to the tablets," said Josh Olson, technology analyst at money manager Edward Jones. "Microsoft is really a show-me story in terms of its ability to extend its core flagship products to these new growth platforms."

On Wednesday, chipmaker Intel Corp warned that PC sales will not be as strong as it had expected this year.

Microsoft is expected to enter the tablet market in earnest next year with the launch of its next operating system -- code-named Windows 8 -- which will be compatible with the low-power chips designed by ARM Holdings favored by tablet and mobile phone makers.

Despite the Windows dip, Microsoft managed to ease past Wall Street's earnings estimates, helped by strong sales of its Office software and Xbox game console, as well as a dramatic drop in its tax bill.

The world's largest software maker follows Google Inc, Apple Inc and International Business Machines Corp in reporting surprisingly good results as technology spending holds up relatively well in an uncertain economy.

BIG BEAT

The Redmond, Washington-based company on Thursday posted net profit of $5.87 billion, or 69 cents per share, up from $4.52 billion, or 51 cents per share, in the year-ago quarter.

That easily beat Wall Street's average estimate of 58 cents, according to Thomson Reuters I/B/E/S. Microsoft has beaten the average profit estimate for each of the last nine quarters.

Microsoft was helped by an unusually low tax rate of 7 percent in the quarter, which cut its tax bill by more than $1 billion from the year before, to $445 million. The company, which gets most of its revenue from overseas, said the savings were due to a one-time tax gain and more business flowing through its regional centers in the low-tax jurisdictions of Ireland, Singapore and Puerto Rico.

Sales rose 8 percent to $17.37 billion, ahead of analysts' average estimate of $17.23 billion, boosted chiefly by sales of Office, Xbox and server software behind Microsoft's push into Internet-centric, or "cloud" computing.

Microsoft shares fluctuated after the results were announced in after-hours trading, settling close to their closing price of $27.09 on Nasdaq. The stock is up 8 percent over the past 12 months, compared to a 30 percent rise in the Nasdaq composite index. The shares are stuck at a level first hit in 1998, adjusted for stock splits.

"These numbers are good. The question is, what will make Microsoft break this range in which it is stuck, between $25 and $28?" said Trip Chowdhry, managing director at Global Equities Research. "I don't see these numbers giving an indication that the stock is going to break away."

OFFICE, XBOX STAR

Spending by businesses on technology has generally outstripped cash-strapped consumers since the worldwide economic downturn.

Microsoft's business division, which last month rolled out online versions of its popular Office suite of programs such as Outlook, SharePoint and Excel, was the company's biggest seller in the quarter, racking up a 7 percent increase in sales to $5.8 billion.

The server and tools business, which sells software used by datacenters -- an essential building block of cloud computing -- posted a 12 percent increase in sales to $4.6 billion.

The entertainment and devices unit, which sells the company's video game and phone products, posted a 30 percent increase in sales to $1.5 billion, mostly due to the popularity of the Xbox and the new hands-free gaming Kinect add-on.

Sales at the Windows unit fell 0.8 percent to $4.7 billion. PC sales grew only 2.3 percent in the second quarter, according to tech research firm Gartner, well below earlier projections, as economic uncertainty hangs over consumers and Apple's iPad and other tablets eat into the market.

Microsoft's perennial money-losing online services unit, which runs the Bing search engine and MSN Internet portal, posted a 16.5 percent increase in sales to $662 million, but its loss widened to $728 million from a loss of $688 million a year ago, as Microsoft continues to pour money into attacking Google. The unit has now lost almost $6.5 billion in the last three fiscal years.

(Additional reporting by Alexei Oreskovic in San Francisco and Liana Baker in New York; Editing by Richard Chang)

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