Microsoft Corporation (NASDAQ:MSFT) reported its first quarter results on Thursday. The company’s revenues declined 22 percent. The revenues were affected by an 8 percent decline in PC sales. Additionally, many consumers delayed purchasing, as they are waiting for the upcoming Windows 8 operating system.

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Microsoft Corporation (NASDAQ:MSFT)s CFO, Peter Klein, said that the economic environment and the PC markets were challenging in the first quarter. He said the sales were also affected because the original equipment manufacturers (OEMs) reduced their Windows 7 inventory, as they are transitioning to Windows 8.

Total first quarter revenues stood at $16.01 billion, with $4.47 billion net profit, or 53 cents per share. The world’s biggest software company deferred $1.36 billion in revenues, due to upgrades related to Windows 8 and Office 2013 software. Analysts were expecting a revenue of $16.45, with 60 cents in EPS. In the same period last year, Microsoft had earned $5.74 billion, or 68 cents per share, with a revenue of $17.37 billion.

Along with Windows 8, Microsoft Corporation (NASDAQ:MSFT) is also releasing its highly anticipated Surface Tablet next week. Windows Phone 8 is expected to be released on October 29.

Unit wise, the revenues of its Server & Tools business grew 8 percent to $4.55 billion. The sales of Microsoft’s Business division, which sells the Office package, declined 2 percent to $5.5 billion. The worst performer was its Windows and Windows Live division, as its sales dipped 33 percent to $3.24 billion. The sales of Entertainment and Devices business decreased 1 percent to $1.95 billion. The Online Services revenues were up 9 percent to $697 million.

Richard Williams, of Cross Research, said that revenue deferrals were expected for Windows 8. If you add the deferred revenues, Microsoft posted a strong quarter. The company’s non-GAAP revenues, which include the deferred revenues, stood at $17.36 billion; and non-GAAP profits were 65 cents a share. Williams maintains a buy rating for Microsoft stock, with a price target of $37.

Nomure Analysts think that  Microsoft can deliver a more fully-functional tablet than the iPad, with Office functionality that leverages the needs of the more sticky market of productivity users, the business and prosumer market. The new version of Office (Office 2013) which will be delivered in a kind of phased way over the next few months has some important new functionality that derives from the integration of Skype, SkyDrive and Yammer which are combined in a synergistic way to deliver social and workgroup collaboration, which is all the buzz in the enterprise application market right now, around
the collaborative enterprise.

Furthermore, they believe  that if f Microsoft were to deliver some Office capabilities on the iPad, it might help sustain higher prices for tablets from Microsoft and Apple and while this could help Apple cannibalize Windows, if done in a way that minimizes this but enables the workgroup collaboration to reach across the divide and address Apple users this could be market enhancing for the adoption of the new Windows and Office platform. If Microsoft were to lag behind in delivering this to the Android platform, this could undermine Android adoption at the more functional level and tier the market with the pricing risk of a commoditizing Android ecosystem isolated more to the less functional end of the market.

Though Microsoft Corporation (NASDAQ:MSFT) underperformed in the first quarter, analysts have high expectations with the December ending quarter. Wall Street analysts expect the second quarter sales to be $22.96 billion, with 87 cents in earnings per share. Microsoft stock is up 14 percent for the year to date.