Microsoft Profit Falls for First Time in 23 Years

24th,April,2009



Fresh off one of the worst quarters in company history, Microsoft offered investors little evidence that a beleaguered personal computer market would recover anytime soon.
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Times Topics: Microsoft Corporation

On Thursday, Microsoft set the wrong kind of record, as it reported the first year-over-year quarterly revenue decline since it first sold stock to the public in 1986. In its third quarter, which ended March 31, Microsoft said its revenue fell 6 percent, to $13.65 billion, from $14.45 billion. It reported net income of $2.98 billion, or 33 cents a share — a 32 percent drop from the $4.39 billion, or 47 cents a share, reported in the period last year.

The company’s Windows franchise has come under unprecedented pressure during the recession as consumers and businesses have shied away from buying new computers or have purchased cheaper machines. While Intel, the chip maker, said last week that the worst of the PC decline had passed, Microsoft displayed no such confidence.

“I didn’t see any improvement at the end of the quarter that gives me encouragement that we are at a bottom and coming out of it,” Christopher P. Liddell, Microsoft’s chief financial officer, said during a conference call to discuss the company’s results. “They stopped getting worse, but that’s different from they started getting better.”

The recession has generated a series of firsts for Microsoft, including its first large layoff and first decline in Windows sales.

Microsoft, based in Redmond, Wash., said its earnings included 6 cents of charges related to the layoffs and impairments to investments.

Analysts surveyed by Thomson Reuters had expected Microsoft to earn 39 cents a share, excluding the one-time charges, on revenue of $14.1 billion.

Intel supplies the processors for most PCs, while Microsoft supplies the key operating system software.

Last week, Intel’s chief executive, Paul S. Otellini, declared that “the worst is now behind us.”

Mr. Liddell of Microsoft maintained a more somber tone. “While we would all like to think a recovery will be soon and painless, we actually believe it will be slow and painful,” he said.

Still, shares of Microsoft rose in after-hours trading after release of the results as investors apparently took solace from the company’s cost-cutting efforts.

Microsoft has lowered its forecast of its operating expenses by as much as $1 billion for the year.

“Microsoft, like everyone else, has got serious about cost-cutting,” said Brendan Barnicle, a software analyst with Pacific Crest Securities. “They never really had to do that before, and investors had been hoping they would cut more.”

Microsoft’s online services business, which competes with Google and Yahoo, continued to disappoint observers as a depressed advertising market pushed sales down to $721 million, from $843 million.

“The online business looked bad, but I still believe they have to be in that space to fulfill the larger vision of where Microsoft is going,” said Richard Williams, the senior software analyst at Cross Research. “It may mean that they have to acquire rather than build.”

Microsoft has been in talks with Yahoo about some kind of partnership in online advertising.

In the company’s core Windows business, sales declined to $3.4 billion in the quarter, down from $4 billion in the period last year.

Netbooks, the cheap, small laptops that have surged in popularity, remained the big story. According to Microsoft’s research, PC sales fell 7 to 9 percent during the quarter. Excluding netbooks, traditional PC sales fell 15 to 17 percent.

Last quarter, netbooks accounted for about 10 percent of PC sales, Microsoft said. Netbooks are a mixed blessing for Microsoft. The company’s average selling price for Windows has declined, because it ships a discounted version of the older Windows XP on netbooks. Microsoft’s Windows profit fell 19 percent, to $2.5 billion.

On a positive note, many customers have bought netbooks as complements to their existing computers, representing fresh revenue for Microsoft and Intel during these lean times.

However, “there are some real challenges in that business behind this shift to the low end,” said Israel Hernandez, director of software research at Barclays Capital. “And on the horizon, you have Apple and Google who appear ready to introduce their own takes on netbooks.”

Microsoft declined to offer specific financial guidance for the coming quarters.

Shares of Microsoft ended regular trading Thursday at $18.92, up 14 cents. The company released third-quarter figures after the market closed, and in after-hours trading the shares rose more than 3 percent, to $19.50.