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Flagging PC market a bad sign for Microsoft's bottom line

Microsoft created Windows 8 to compete with companies such as Google for some of the smartphone and tablet market share.

Peter Power/The Globe and Mail

For Microsoft Corp., a 14 per cent drop in first-quarter personal computer shipments does not augur well for earnings.

The world's biggest software maker by revenue has its fortunes closely tied to the flagging global PC business and is scrambling to catch up with a dramatic consumer shift to mobile devices.

Investors will listen closely to what senior Microsoft executives say on a conference call after the giant's third-quarter results come out Thursday. One particular issue is that the new Windows 8 operating system – aimed at making the desktop and laptop experiences more tablet-like – is a hindrance, rather than help, to the PC market.

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The new software was supposed to be a key element in Microsoft's big, new strategy to develop consumer-friendly software in the hot smartphone and tablet markets. So far, though, the verdict is that it just has not been able to challenge cutting-edge players such as Google Inc. and its popular Android and Chrome systems.

In its defence, Microsoft says it has sold about 60 million copies of Windows 8 since its launch last October, "a strong start by any measure."

Still, not everyone is impressed. Merrill Lynch recently downgraded Microsoft stock to "neutral" from "buy," citing poor Windows 8 sales momentum. Nomura Securities Co. Ltd. analyst Rick Sherlund said in a recent research note: "The combination of Windows 8's sluggish adoption and the absence of compelling new hardware have been disappointing, with no relief likely until later this year."

UBS Securities analyst Brent Thill is maintaining his "buy" rating. He said that 2013 should be a transition year to revenue growth in 2014 as the PC market stabilizes with the help of Intel's new Haswell chip platform enabling longer battery life.

Colin Gillis of BGC Financial is maintaining his $31 (U.S.) price target, but reducing his recommendation to a "hold" from a "buy."

"Given the change in the computing landscape, it may prove difficult for the PC market to experience growth. We expect PC shipment revisions to continue a negative trajectory," he said in a research note.

"Microsoft's minimal participation in [smartphone and tablet] markets is becoming an increasingly urgent problem that may prove difficult to reverse."

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