Microsoft estimates that last quarter, consumer PC sales fell 6% over the year. Surprisingly, the decline was led by the falling sales of netbooks, which are being replaced by iPads and the recently released Kindle Fire. Excluding sales of netbooks, PC sales would have reported growth of 2% last quarter. A year ago, netbooks accounted for nearly 8% of the PC market. However, recent reports suggest that they account for only 2%. In addition, macroeconomic factors of supply chain shortages because of floods in Thailand and the continuing recession that hurt market growth. Gartner too estimates that global PC sales fell 1.4% over the year last quarter and were particularly hurt by the shortage of hard disk drives because of the flooding in Thailand.
Despite the gloom, Microsoft’s (NASDAQ:MSFT) Q2 revenues were the highest ever at $20.89 billion. Revenues grew 5% over the year and were in line with market expectations. EPS of $0.78 was ahead of the market’s projected earnings of $0.76 per share.
The declining netbook sales hurt Windows revenues, which fell 6% over the year to $4.74 billion. However, the decline was compensated by 11% growth in server and tools revenues to $4.77 billion and 15% growth in entertainment and services division revenues to $4.24 billion.
Microsoft’s Windows 8
Microsoft is counting on Windows 8 release, which is expected this year. Microsoft will launch a beta version next month, ending the wait for the smartphone and tablet OS. Microsoft lags far behind Google and Apple within the mobile segment. For now, the analysts have given good reviews to the peek they have gotten into the OS. Windows 8 is expected to come with features such as touchscreen capability, ability to access multiple apps, and even a Windows Store with a listing of apps to help simplify navigation.
According to comScore data, for the three months ended November 2011 Android-based smartphones in the U.S. accounted for 46.9% of the market share compared with 43.8% a quarter ago. Apple’s share also continued to grow to 28.7% compared with 27.3% in the three months ended August 2011. Meanwhile, Microsoft’s share declined in the same period from 5.7% to 5.2%.
Below is an infographic from TechCrunch.com that shows the decline of Microsoft OS within the U.S. market.
Through the release of Windows 8, Microsoft is hoping to reverse this trend. There is also speculation in the market that Microsoft may be thinking of acquiring RIMM or Nokia. I believe that Nokia is a better match because Nokia has already adopted Windows OS on their phones.
Microsoft’s Entertainment Division
Microsoft has seen strong growth in their Xbox business. Since their launch, Microsoft has sold more than 66 million Xbox consoles and 18 million Kinect Sensors. Xbox has an estimated 20% share in the gaming consoles market, and its share is expected to continue to grow. To add to their offerings, last quarter Microsoft acquired VideoSurf, a provider of mobile app for Android OS. VideoSurf’s app listens to and records snippets of TV shows or movies to search for information on the TV show, episode details, and cast list. The app comes preloaded on Verizon Wireless–operated Android phones. Users can also share the results through social networking tools such as Facebook or Twitter. Microsoft plans to add VideoSurf’s services to Xbox Live to continue to build its online user engagement.
Meanwhile Microsoft is also seeing positive trends for their search engine Bing. According to a comScore report released earlier this month, search queries on Bing surpassed those on Yahoo for the first time last December. While Google maintained leadership with 65.9% market share of the search queries in the U.S., Bing came in second with a 15.1% market share. A month ago, Bing’s share was marginally lower at 15%. Bing’s expansion can be attributed to the troubled times at Yahoo, which saw its market share fall from 15.1% in November to 14.5% in December.
Microsoft’s stock is just shy of 52-week highs of $29.95 with a current market capitalization of $249.46 billion. Microsoft may have struggled this quarter with consumer desktop Windows sales, but they are compensating that decline by positioning themselves well in other segments. Enterprises continue to purchase Windows 7 upgrade and Office 2010 licenses, Kinect sales are booming, and in the online segment, Bing’s recent second place ranking for search queries is a positive trend as well. For the coming quarters, though, the market has big expectations from Windows 8. Only time will tell if Microsoft will be able to meet them.