Microsoft's sales show fallout of recession

Fri, 04/24/2009 - 8:05am
Jessica Mintz, AP Technology Writer

SEATTLE (AP) – The link between Microsoft Corp.'s fortune and the health of the personal computer market has rarely been clearer than in the software maker's fiscal third quarter.

For the first time in Microsoft's 23-year history as a public company, revenue fell year-over-year as PC shipments tumbled. Earnings sank 32 percent.

The shortfall again 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. On Thursday afternoon, it announced it would do away with merit pay increases for employees in the next fiscal year.

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

"I didn't see any improvement at the end of the quarter that gives me encouragement that we're at the bottom and coming out of it," said Chris Liddell, Microsoft's chief financial officer.

On Friday at a technology forum in Cologne, Germany, Microsoft's CEO, Steve Ballmer, said the company expects to have to deal with a weak economy for at least the next several years.

"We are planning essentially for the economy to contract," Ballmer said. "That may take two, three, four years, partly depending on government policy to ease some of the pain. Then we will see growth again."

Redmond, Wash.-based Microsoft said that in the quarter that ended March 31, profit totaled $2.98 billion, or 33 cents per share. In the same quarter of 2008, Microsoft earned $4.39 billion, or 47 cents per share.

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.

Excluding those items, Microsoft said it would have earned 39 cents per share, matching the estimate of analysts surveyed by Thomson Reuters.

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, missing analysts' expectations for $14.1 billion.

Even so, Microsoft shares were up $1.11, or 5.9 percent, at $20.03 in trading Friday morning.

"It was not expected to be a very good quarter, and I think it was not a great quarter, but you've seen a lot of not-great quarters in the last month or so," said Cowen and Co. analyst Walter Pritchard.

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.

Both divisions were cushioned to some extent by businesses that renewed bulk software licenses at about the same pace as usual.

Microsoft's online advertising business widened its quarterly loss, and its entertainment and devices division, which makes the Xbox 360 game console and the Zune media player, swung to a loss from the prior year.

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. 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 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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