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Originally published October 18, 2012 at 1:26 PM | Page modified October 19, 2012 at 6:19 AM

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PC waiting game pinches Microsoft results

Revenue and earnings per share lower than had been forecast, as the company heads into a period of major product launches.

Seattle Times technology reporter

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Reflecting a weak PC market and a reduction of inventory before next week's Windows 8 launch, Microsoft reported fiscal first-quarter earnings Thursday that missed Wall Street forecasts.

But analysts also said the weaker-than-expected performance was not cause for panic, especially given the slate of upcoming product launches and Microsoft's big push into the tablet market. It's typical for customers to put off purchases as they wait for new products to arrive.

In addition to the Oct. 26 launch of Windows 8, a launch event for Windows Phone 8 has been scheduled for Oct. 29, and a new version of Office is expected in the first quarter of 2013.

The company Thursday reported quarterly revenue of $16.01 billion — down from $17.37 billion in the same quarter last year — as well as earnings of 53 cents a share on profit of $4.47 billion.

Analysts had forecast revenue of $16.42 billion and earnings per share of 56 cents for the quarter ended Sept. 30, the first in Microsoft's fiscal 2013.

But the numbers also reflect adjustments Microsoft took this quarter, including $1.2 billion in deferred revenue related to a Windows upgrade offer and pre-sales of Windows 8 to manufacturers, and $189 million related to an Office upgrade offer.

Accounting for the adjustments, revenue for the quarter was flat at $17.4 billion and earnings per share was 65 cents, a decline of 4 percent.

Microsoft's bread and butter — its large business customers — came through again, helping bolster the Server and Tools division, which grew 8 percent.

Also notable was the growing shift from one-time purchases of Microsoft licenses toward multiyear licenses.

Such agreements with big businesses grew 15 percent across the company this quarter, and grew 19 percent in the Server and Tools division, which offers products and services for businesses including SQL Server and System Center.

The shift toward multiyear licenses is happening not just within Server and Tools, but also with offerings from other divisions, such as Office 365 and Xbox Live, said Peter Klein, Microsoft's chief financial officer.

"A lot more people are committing to a longer-term relationship with Microsoft, which is clearly what we're striving toward," he said during Thursday's earnings conference call with analysts.

At the same time, the weakening of the PC market clearly affected sales. PC shipments were down about 8 percent for the quarter, according to several research firms' estimates.

Here's how the divisions did:

Windows: $3.24 billion revenue, down 33 percent from a year earlier. (Taking into account the $1.2 billion adjustment, revenue was $4.44 billion, down 9 percent.) Microsoft executives attributed the decline to the weak PC market and drawdown of inventory before the Windows 8 launch. .

Company executives, though, were optimistic about Windows 8, saying Windows revenue accelerated in September and pre-sales of Windows 8 to manufacturers had reached $800 million — about 40 percent higher than Windows 7 pre-sale revenue had been in the comparable quarter.

They also said the company has certified more than 1,000 Windows 8 systems, including tablets, laptops, all-in-one PCs and convertible/hybrid devices.

Business (includes Office, Exchange, SharePoint, Lync, Dynamics): $5.50 billion revenue, down 2 percent. (Taking into account the $189 million adjustment, revenue was $5.7 billion, up 1 percent.)

Revenue from business customers increased 3 percent, reflecting the growth in multiyear licenses and in Dynamics, Microsoft's line of business management software.

Taking into account the Office upgrade adjustment, consumer sales declined 8 percent, offset by multiyear licensing revenue, which grew 8 percent. (Not taking into account the Office deferral adjustment, consumer revenue decreased 25 percent.)

Exchange, SharePoint and Lync collectively grew double digits.

Server and Tools (Windows Server, SQL Server, System Center, Azure): $4.55 billion revenue, up 8 percent. This growth was driven largely by double-digit revenue growth in SQL Server and more than 20 percent growth in System Center, according to the company.

Entertainment and Devices (Xbox, Kinect, Windows Phone, Skype): $1.95 billion revenue, down 1 percent. Executives attributed the drop to the tough game-console market, but noted Xbox remains the top-selling console in the U.S., with 49 percent market share. Xbox Live membership grew 15 percent.

Online Services (Bing, MSN): $697 million revenue, up 9 percent. The division has seen heavy losses, but managed to cut them in the quarter by 29 percent. That stemmed largely from a 15 percent increase in online-ad revenue, itself driven primarily by an increase in revenue per search.

The rise in multiyear licensing agreements indicates big business customers "are buying into the technology road map" Microsoft is offering, said Sid Parakh, research analyst at Seattle's McAdams Wright Ragen.

The softness in the quarter, Parakh said, reflects the broader economic climate, especially for PCs. The market is still tough, he said, and highlights "the need for Windows tablets out there. Because tablets as a product category is doing well and Microsoft has been missing there."

Parakh thinks that, going forward, revenue from tablet sales — including Microsoft's own branded Surface devices, as well as Windows 8 tablets from other manufacturers — should more than offset revenue weakness from traditional PC sales.

"Undoubtedly, first-quarter results were light vs. expectations but not cause for concern other than to short-term traders playing the quarter," said Todd Lowenstein, a fund manager with HighMark Capital Management. "Given the lackluster PC outlook across the food chain, this was not unexpected to the informed investor and does nothing to derail the attractive long-term story and upcoming catalysts surrounding new cycles, including Surface devices and Windows 8 launch."

Microsoft shares closed regular trading Thursday at $29.50, down 9 cents. In extended trading, after the earnings report, the stock dropped to $29.05.

Janet I. Tu: 206-464-2272 or On Twitter @janettu.

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