Falling PC demand puts heat on Microsoft

Sagging demand for new PCs hit Microsoft's earnings in the first quarter this year, adding to pressure on the company to show it can move faster in overhauling its business for the cloud.

However, the US software company still managed to handle the weakness in its core market better than expected in the latest period, leading to a 3.8 per cent rebound in its shares in after-market trading on Thursday.

With the stronger dollar also weighing on reported results, Microsoft's revenues grew 6 per cent to $21.7bn. Wall Street analysts had expected revenues of around $21.1bn.

Margins have also fallen as Microsoft's business has shifted to become more dependent on hardware sales and cloud services, which are less profitable than its traditional software licensing revenues.

As a result, operating profits fell 5 per cent and net income was down 9 per cent in the latest quarter, the third of Microsoft's fiscal year. Earnings per share of 61 cents were down from 68 cents a year before, though still well ahead of Wall Street expectations of 51 cents.

Cloud revenues, meanwhile, grew strongly as customers switched to a new online version of Office and demand picked up for Azure, the company's cloud software platform. Revenues from cloud services rose 106 per cent, continuing the trend of recent quarters

Satya Nadella, chief executive, claimed the figures showed the company was "well on our way to transforming our products and businesses across all of Microsoft." Much of the company's cloud revenue represented new business for Microsoft rather than simply a replacement for lost software sales, with more than half of Azure sales falling into this category, he said, adding: "These are people who never bought a server from us."

Tech research firm Gartner had already estimated that PC shipments fell nearly 6 per cent in the first three months of this year, as a temporary jump in demand caused by the end of support for the Windows XP operating system last year had run its course.

The impact was particularly noticeable in Microsoft's consumer devices and software licensing segment in the latest quarter, where revenues were down 25 per cent to $3.5bn as sales of Windows and Office declined.

Despite rapid growth in cloud revenues, they still represent only around 7 per cent of Microsoft's overall business. That has left Wall Street nervous about how well the company will be able to weather a decline in its core software business as customers move faster to the cloud.

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