Microsoft sales fall for first time in 23 years

Software giant revenue drops 6% and earnings plummet 32% as PC sales continue to weaken.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Microsoft Corp. said Thursday that declining PC sales hurt revenue, as the software giant reported quarterly sales that fell for the first time in its 23-year history as a public company.

The Redmond, Wash.-based company said sales fell 6% from a year earlier to $13.7 billion, missing analysts' expectations of $14.1 billion.

Meanwhile, the company's net income fell 32% to $2.98 billion, or 33 cents per share, in its third quarter ended March 31.

Results included charges totaling 6 cents per share for job cuts and investments that took place in the quarter. Without the charges, Microsoft earned 39 per share, in line with forecasts by analysts polled by Thomson Reuters, which typically exclude one-time items.

Microsoft said weakness in the global PC market negatively impacted its results.

Still, shares of Microsoft (MSFT, Fortune 500) rose 4% after hours, as the company performed roughly in-line with expectations. In the previous quarter, results came in well below forecasts, and Microsoft rescinded its prior outlook for 2009.

"Expectations were much more tempered now," said Katherine Egbert, analyst with Jefferies & Co. "People now understand that near-term business won't be so good."

On a conference call with analysts, Chris Liddell, Microsoft's chief financial officer, said the current recession has been "the most difficult economic environment we've faced in our history." He noted that he expects the recovery to be slow and gradual, but again he declined to give a specific outlook for the next three-month period.

Still, Liddell said he was encouraged by the company's ability to cut costs.

"While I can't be happy in any quarter in which our revenue and earnings per share decrease, I'm pleased with our relative performance," he added.

Demand quagmire: The company has had a difficult time combating slumping demand for its Windows operating system, as the economic slowdown has dragged PC sales down 7% to 9%, according to Microsoft's estimates.

The recession has also prompted many consumers to opt for cheaper, scaled-down "netbooks" that perform only basic tasks such as e-mail and accessing the Internet. They typically run a lower-cost version of Windows or an open-source operating system such as Linux.

"The trouble for Microsoft is that its cash cow is shifting," said Carl Howe, analyst with Yankee Group. "PC sales are troubled, and they're getting hurt by the move to cheaper notebooks."

In January, Microsoft announced its first mass job cuts in its 34-year history in an effort to bolster its bottom line The company slashed 1,400 position during the quarter with another 3,600 expected to be cut by mid-2010. At that time, the company said it was also adding a few thousand positions, mainly in its online advertising division.

"While market conditions remained weak during the quarter, I was pleased with the organization's ability to offset revenue pressures with the swift implementation of cost-savings initiatives," said Liddell. "We expect the weakness to continue through at least the next quarter."

Sales and profit fell in all of Microsoft's businesses, except its server business, which managed to squeeze out a 7% rise in revenue and a 24% jump in earnings. The entertainment and devices division, which includes the Xbox 360, suffered a 2% revenue decline and an operating loss of $31 million from a year earlier. The company's business division sales dropped 5%.

Windows: The company is banking on a new operating system to break out of its slump.

Microsoft's Vista operating system, which was released in early 2007, never took off like the company had hoped. Sales in the division that produces Vista fell 16% in the previous quarter. User satisfaction has been underwhelming, and IT departments have largely opted to stick with Vista's predecessor, Windows XP.

"Microsoft can't point to anything in their mix of products that excites people right now," said Allen Weiner, analyst with tech consultancy firm Gartner Research.

Early reviews of Microsoft's new Windows 7 system have been largely positive, but the stated release date isn't until late early 2010. Analysts think that Microsoft will push up the release date to later this year to help spur PC sales around the holiday season. The company expects the unveiling of its new operating system will help increase sales even if economic conditions remain challenging.

Online advertising funk: Microsoft has also continued to struggle to compete with rivals Google (GOOG, Fortune 500) and Yahoo (YHOO, Fortune 500) in the online advertising business. Microsoft's Online Services division, which includes the online portal MSN and its Internet advertising sales, lost $575 million in the quarter, and sales in the division were down 14% from the same quarter a year earlier.

Microsoft said the loss in its ad sales division was due to the significant decline of average rates in display advertising.  To top of page

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