Microsoft's latest quarterly earnings slipped, despite showing modest progress adjusting to a shift away from the personal computers that have been its financial foundation for decades.
The results announced last night are the first to include Windows 8.
Windows 8 is a dramatic overhaul of the Microsoft's operating system that powers most PCs. It came out October 26 with over two months left in Microsoft's fiscal second quarter.
The company is the world's largest software maker.
Although the Windows 8 sales have not been as impressive as investors hoped, revenue in Microsoft's Windows division climbed 24% from the previous year.
At the same time Windows 8 hit the market, Microsoft also released its own tablet computer, Surface, as a showcase for a streamlined version of the operating system. Microsoft did not immediately disclose how many Surface devices were sold in the three months from October to December.
Microsoft said it earned $6.4 billion, or 76 cents per share, during the final three months of the year. That was down 4% from $6.6 billion, or 78 cents per share, a year earlier.
The company's total revenue rose 3% from last year to $21.5 billion. The earnings were a cent above the average estimate of analysts surveyed by FactSet while the total revenue fell below analysts' projections by about $100m.
Microsoft's stock shed 2.2% in extended trading last night after the release of results. The stock has remained stuck below its price before Windows 8 and Surface came out, signaling that investors are not pleased with the products' performance so far.
Microsoft is counting on Windows 8 to help the company extend its franchise into tablet computers while still reaping revenue from a new breed of PCs.
The redesigned software displays applications in a mosaic of interactive tiles instead of a staid menu. It can be controlled by touching on a display screen, as well as the traditional method of using a keyboard and a mouse.
Besides debuting Windows and Surface during the most recent quarter, Microsoft also released a new version of its operating phone for smartphones.
If Microsoft's revamped software for tablets and smartphones catches on, it would help the company overcome a downturn in PC sales, which has reduced licensing revenue during the past year.
Worldwide PC shipments fell 3.5% last year, marking the industry's first annual decline since 2001, according to the research firm Gartner.
Despite Microsoft's high hopes and an elaborate marketing campaign, Windows 8 appears to have gotten off to a tepid start. Technology reviews have panned the software as too confusing and cumbersome to navigate, and none of the hundreds of devices running on Windows 8 emerged as a breakout hit during the holiday season.
A big chunk of Microsoft's Windows revenue in the holiday-season quarter came from sales that were made before the new operating system's release. Excluding revenue that had been deferred from previous quarter, Windows revenue increased 11% from the same time in 2011.
The Surface also has not been able to mount a significant challenge to Apple's trend-setting iPad, Amazon.com's Kindle Fire, Samsungs Galaxy or Google's Nexus devices.
Surface, which runs on a streamlined version of Windows 8, is meant to showcase how well the software works on a tablet. A version of Surface running the full version of Windows 8 comes out February 9.
Microsoft said it has licensed more than 60 million copies of Windows 8. That puts the redesigned system on the same early sales trajectory as its predecessor, Windows 7, after it came out in 2009. But it is unclear how many of the devices that have licensed Windows 8 are still sitting on shelves in shops.