Microsoft executives earlier this week hinted at lowered expectations for Windows revenues in the fourth quarter of 2011, citing data from research firms that point to a stall in PC shipments at the end of the year.
On Tuesday, a pair of Microsoft executives referred to contractions in PC sales in the fourth quarter during briefings held at the Consumer Electronics Show (CES). As Microsoft regularly notes in its calls with financial analysts, revenue from the Windows group is tightly tied to sales of new PCs.
"If you look at third parties, they were kind of, call it, mid-single digit expectations [of growth] for the PC market, if you go back to October," Bill Koefoed, Microsoft's general manager of investor relations, said Tuesday at an event hosted by JP Morgan. "IDC and Gartner and some others kind of lowered that.... I think they were kind of at minus 1 as they updated the PC market forecast in December."
Koefoed, who attributed part of the decline in PC sales growth to floods in Thailand, which limited supplies of hard disk drives, anticipated even more of a drop.
"As the numbers come out, as the results are projected, you'll likely see that number decline further as the impact has been felt faster than I think people had anticipated," Koefoed said.
Later in the day, Tami Reller, the chief financial officer for the Windows division, said much the same.
"If we look back, IDC and Gartner adjusted down from mid-single digits [of year-over-year growth] to minus one for the December quarter," Reller said in a separate briefing sponsored by Nomura Holdings. "And I think as they look at other potential impacts and maybe even a little bit more economic reality, could there be similar adjustments? Potentially."
Yesterday, IDC and Gartner released their PC sales estimates for the quarter ending Dec. 31, 2011, and as Koefoed and Reller had figured, the numbers were gloomy.
IDC put global personal computer shipments at 92.7 million for the fourth quarter, down 0.1% from the same quarter the year before.
Rival Gartner, meanwhile, was even more pessimistic, saying that worldwide PC shipments were down 1.4% for the quarter.
Both IDC and Gartner blamed the Thailand flooding -- and ensuing hard disk drive shortages -- along with the continued unsettled global economy and competition from alternative devices, primarily smartphones and tablets, for the lower PC numbers.
The U.S. market for PCs was particularly anemic, the research firms said. IDC estimated fourth-quarter PC shipments in the U.S. were off 6.7% year-over-year, while Gartner pegged the downturn at 5.9%.
Hewlett-Packard was the PC maker whose shipments fell the sharpest, according to IDC and Gartner, which estimated a worldwide decline of 3% and 3.5%, respectively, for the company, which reversed itself last year and decided to keep its PC arm.
In the U.S., Apple posted the largest increase, with growth estimates ranging from 18% (IDC) to 20.7% (Gartner).
Since most new PCs are equipped with Windows -- and because operating system revenues come primarily from sales of licenses to computer makers -- Microsoft typically attributes the ups and downs of Windows revenue to the rise and fall of PC shipments. In 2011's third quarter, for example, revenues from the Windows and Windows Live group climbed 1.7%, much less than the 3.6% and 3.2% year-over-year increases that IDC and Gartner estimated for PC shipments in the period.
"There's a pretty direct correlation between PCs sales and Windows revenue," said Allan Krans, an analyst with Technology Business Research. "[PC sales] are the key determiner for Windows revenue."
And things could get worse for Microsoft before they get better, according to Krans, IDC and Gartner.
IDC and Gartner expect that PC shipments will continue to stall in the first quarter of 2012, or even through the year's first half, before recovering to double-digit growth near the end of the year.
"The industry still needs to work through some key hurdles in 2012, including recovery of [hard disk drive] supply, the launch of Windows 8, and successful evolution of PC design to become still more mobile," Loren Loverde, who leads IDC's shipment tracking team, said in a statement Wednesday.
"It's not just a matter of PC shipments being lower, but how computing is being done today that's working to their disadvantage," said Krans. "They haven't been able to get market control over the new devices like smartphones and tablets."
While Krans noted Microsoft moves on those markets -- the improvements in Windows Phone 7, the expected debut of Windows 8 on ARM processor-equipped tablets -- he said it will take time for them to bear fruit.
"It's at least a two- or three-year strategy," Krans said.
Microsoft is scheduled to release its 2011 fourth quarter earnings, which will include details on Windows revenues, a week from yesterday, on Jan. 19.