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Weak PC sales to impact Microsoft

Both IDC and Gartner have reported weak first quarter sales for the PC industry, and that's likely to translate into some profit headwinds for Microsoft in its fiscal third quarter.
Written by Larry Dignan, Contributor

Both IDC and Gartner have reported weak first quarter sales for the PC industry, and that's likely to translate into some profit headwinds for Microsoft in its fiscal third quarter.

IDC said PC sales fell 3.2 per cent in the first quarter due to media tablet sales, Japan's earthquake, oil costs (which take money away from the IT budget) and slowing corporate demand. Gartner called enterprise PC sales a bright spot, but projected that first quarter sales will be down 1.1 per cent. The upshot: PC sales are weaker than expected.

All of those slowing PC sales figures point in Microsoft's direction since partners Hewlett-Packard (HP), Dell and Acer saw unit declines. Among key Windows PC partners, only Lenovo showed strong gains. Analysts on Thursday were scurrying to lower estimates for Windows revenue. Barclays analyst Israel Hernandez said:

While [first quarter] growth rates were worse than expectations, we believe the result underscores persistent headwinds that Microsoft's Windows business is likely to face in coming quarters, chiefly a maturing PC market but more ominously share erosion to new form factors such as tablets and smartphones and a resurgent Mac platform, which year-on-year increased share from 7.3 per cent to 9.3 per cent in Q1 according to Gartner.

Morgan Stanley analyst Adam Holt noted that the pressure is on Microsoft to deliver a tablet answer with Windows 8. Without answers to the tablet market, Microsoft will be increasingly at risk for its Windows cash cow. Fortunately for Microsoft, the Servers and Tools unit should offset weakness in Windows.

Oppenheimer analyst Brad Reback said that everything that could go wrong in the first quarter for PC sales did go wrong. For instance, Japan was hit with its earthquake, consumers were buying tablets and Intel delayed Sandy Bridge. But Reback said that the corporate PC upgrade cycle should give Microsoft some comfort.

Although the PC market still struggles, we believe one bright spot remains the professional/enterprise market. We believe the relatively stable macro-economy coupled with pent-up demand is driving solid uptake across large enterprises. Additionally, we believe the SMB refresh-cycle is just getting underway and should aid growth throughout 2011.

In January, Microsoft projected that its Windows and Windows Live units would grow in line with PC sales. Now that projection equates to a small decline for Windows revenue.

Via ZDNet US

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