Microsoft feels more recession fallout, sales drop

April 23, 2009

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FILE - In this Aug. 15, 2008 file photo, desktop PCs running Microsoft's Windows operating system are seen on display at Best Buy in Mountain View, Calif. Microsoft Corp. on Thursday, April 23, 2009 said its quarterly revenue fell from the previous year for the first time in its 23-year history as a public company, and its profit fell more sharply than Wall Street was expecting. (AP Photo/Paul Sakuma, file)

(AP) -- Microsoft Corp. said Thursday its quarterly revenue fell from the previous year for the first time in its 23-year history as a public company, and its profit fell more sharply than Wall Street was expecting.

The shortfall illustrated the toll the recession has taken on the world's largest software maker, even though Microsoft remains one of the richest and most profitable companies. In January, Microsoft said it needed to resort to its first mass layoffs, cutting 5,000 jobs, and on Thursday it announced it would do away with merit pay increases for employees in the next fiscal year.

Microsoft also did not issue earnings guidance for the rest of the year, and its earnings statement offered no hope for a rebound in the current quarter.

Redmond, Wash.-based Microsoft said that in its fiscal third-quarter, which ended March 31, profit dropped 32 percent to $2.98 billion, or 33 cents per share. In the same quarter of 2008, Microsoft earned $4.39 billion, or 47 cents per share.

Analysts surveyed by Thomson Reuters expected a stronger profit of 39 cents per share in the most recent quarter.

Microsoft's profit included a $290 million charge for severance from some of the layoffs announced in January. The software maker also wrote down $420 million related to investments that lost value.

Microsoft avoided a steeper drop in profit by slashing costs in several areas, such as sales and marketing, which it cut by 9 percent to $3 billion.

Revenue in the last quarter slipped 6 percent to $13.6 billion, falling short of analysts' expectations for $14.1 billion.

Microsoft makes most of its profit selling the Windows operating system and business software such as Office, and those divisions have been hammered over the last six months as consumers and businesses sharply cut their technology spending. The holiday quarter, which ended in December, was the PC industry's worst in six years, according to research groups IDC and Gartner Inc. In the following quarter, computer shipments sank about 7 percent.

Even the brightest spot in the PC market - tiny, recession-friendly laptops known as netbooks - had a downside for Microsoft, because those inexpensive computers run a cheaper version of Windows XP, Microsoft's last-generation operating system.

The Windows division's profit fell 19 percent to $2.5 billion, and its sales sank 16 percent to $3.4 billion in the last quarter.

The division that makes Office saw its profit drop 8 percent to $2.9 billion on revenue that declined 5 percent to $4.5 billion.

Shares of Microsoft added 14 cents to close at $18.92. In extended trading after the earnings report, the shares gained 4 percent.

Microsoft said the current quarter would probably still be weak in the markets for PCs and computer servers. Other technology companies have offered mixed assessments about whether a recovery is in sight.

Last week, Intel Corp. CEO Paul Otellini raised some hopes when he said the PC market had bottomed out in the first quarter. And on Thursday, EMC Corp. CEO Joe Tucci predicted that spending on information technology "has reached or is very near the bottom" and should rebound in the second half of this year. He made those comments even as EMC reported that first-quarter profit dropped 23 percent and the company planned more cost cuts.

Other executives have been more cautious. "I don't know how someone could say we've hit bottom in the current economic climate," Dirk Meyer, the CEO of Intel's main rival, Advanced Micro Devices Inc., said Tuesday.

Even as Microsoft and EMC reported profit and revenue declines Thursday, two e-commerce companies fared better.

Leading online retailer Amazon.com Inc. said profit rose 24 percent and revenue jumped 18 percent. And Netflix Inc. posted a 68 percent leap in profit, as more people turned to its DVD-by-mail service as an affordable entertainment option during the recession.

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