PC sales slump will likely bring Windows down too

When Microsoft reports earnings today, Windows sales are expected to fall as consumers extend the lives of their current PCs and spend on other devices such as Apple's iPad.

When Microsoft announces its fiscal third quarter earnings after the market closes today, most analysts will zero in on one data point--how Windows is selling.

Windows--one of the three engines that powers Microsoft sales and profits, along with Office, and server software--seems likely to have a sluggish quarter. Two weeks ago, research firm IDC surprised industry watchers with a report that global PC shipments declined 3.2 percent during the first quarter, compared with the year-ago period, citing "cautious business mentality and waning consumer enthusiasm."

Microsoft

"Clearly, the PC market is under pressure," said Adam Holt, a Morgan Stanley analyst. And since the vast majority of PCs run Windows, Microsoft earnings are under some pressure too.

There's little doubt that Microsoft will report its best-ever fiscal third quarter revenue. But with slowing PC shipments, Windows, which should account for about 28 percent of Microsoft's overall sales this quarter, will be a drag on earnings. Slowing sales of Windows, long the fuel for Microsoft's economic engine, is cause for some concern.

On Tuesday, Holt cut $200 million from his projections for Windows sales in the fiscal third quarter to $4.47 billion, a 4 percent decline from the year-ago period. And since Windows accounts for about 28 percent of Microsoft's overall revenue, Holt nudged his overall quarterly estimates downward, expecting the company to earn $4.47 billion on sales of $15.8 billion.

Microsoft seemingly got a boost from Intel's solid earnings report last week. The chipmaker cited healthy PC demand as a driver. And Intel was particularly bullish on sales in emerging markets, where PC penetration is low.

While Microsoft, too, could benefit from sales in those markets, Holt noted that Microsoft's results don't directly map to Intel's numbers. "Intel is seeing strength in emerging markets where Microsoft has high levels of piracy," Holt said. Microsoft has had little success staunching the use of illegal copies of Windows in many of those markets. If that continues, the company is unlikely to reap the same sort of significant sales growth in emerging markets.

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The biggest challenge Microsoft faces with Windows is in the consumer market. The data from IDC suggest that consumers are holding onto their older laptops longer. "PC lifetimes are extending," said IDC analyst Bob O'Donnell.

And when consumers do decide to spend money on technology, they are increasingly opting for tablet computers such as Apple's iPad. A February Morgan Stanley report estimated that 29 percent of the tablet sales this year will come at the expense of new PC purchases, reducing PC market growth by 3 percentage points. That cannibalization suggests to some, most notably Apple CEO Steve Jobs, that the industry is entering the "post-PC" era .

Despite the enthusiasm for the iPad, O'Donnell says the PC still has plenty of life left. Apple has sold 4.7 million iPads in the quarter, compared with the 80 million PCs that computer makers sold. "You know, 4.7 million iPads is great, but it's not killing the PC," O'Donnell said.

Moreover, Apple seems to be the only tablet maker that's having any success. Sales of Motorola's Xoom have been anemic, and Samsung has acknowledged that its Galaxy tablet hasn't met revenue expectations. And the newly launched Research In Motion PlayBook hasn't won over reviewers .

While questions linger over the consumer PC market, most analysts expect corporate PC sales to improve as businesses continue to upgrade to Windows 7, launched in October 2009. Last week, Microsoft announced it sold 350 million Windows 7 licenses. Corporate IT departments have created virtually immovable infrastructures around buying, fixing, and upgrading Windows PCs.

"PCs are definitely losing cool and buzz," said longtime analyst Roger Kay, president of Endpoint Technologies. "But there's a tremendous amount of inertia holding them in place, particularly in the corporate space."

That's one reason why IDC is forecasting PC shipments of 372.9 million units worldwide in 2011, a 7.4 percent increase from 2010. And the worldwide forecast for PCs from 2012 to 2015 is all double-digit growth, based largely on the corporate upgrade cycle and computer sales in emerging markets.

Windows will no longer generate the sort of buzz that keeps investors excited. And the recent decline in PC sales is ominous. But the post-PC era hasn't arrived just yet.

 

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