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Soft PC Sales Send Microsoft Profit Down 29 Percent

Fri, 07/24/2009 - 5:07am

WindowsVistaforSale(AP) -- There isn't much Microsoft Corp. can do to avoid what is shaping up to be a tough rest of 2009.

The same grim conditions that plagued the world's largest software maker in the first six months of the calendar year - weak computer sales, frozen corporate technology budgets - may not get worse from here, but they are not going to dissipate any time soon. However, the company expects business to brighten in the first half of the next calendar year.

That was one of the messages delivered by Microsoft Chief Financial Officer Chris Liddell in a conference call Thursday, after the company said revenue missed Wall Street's expectations by $1 billion and earnings slumped 29 percent in the fiscal fourth quarter.

The results capped a fiscal year in which revenue fell for the first time since the company went public in 1986. For the full year, Microsoft said its profit slid 17 percent to $14.6 billion, or $1.62 per share, as sales sank 3 percent to $58.4 billion.

Investors were displeased, sending Microsoft shares down $2, or 7.8 percent, to $23.56 in after-hours trading. Before the earnings report the stock had gained 3.1 percent to close at $25.56.

Technology executives have been pressed to weigh in on whether the industry has hit its lowest point since Intel Corp.'s CEO declared in April that PC sales had "bottomed out" after their worst holiday season in six years.

Over the last few quarters, Liddell said, Microsoft "felt we couldn't necessarily see the bottom. I think that at least we are seeing signs now of the bottom."

But Liddell said the rest of the calendar year, at least, will be difficult for Microsoft. That's because the software maker's success is tethered to the PC industry, which is expected to sell fewer computers this year than last - the first such decline since 2001. Many buyers are holding on to their existing machines for longer than usual to save money in the recession. Among consumers, the hottest segment of the PC market is in low-cost "netbooks," which run Windows XP, a lower-profit product for Microsoft than the newer Windows Vista.

"For Microsoft, it's not a case where they're losing market share, or losing out to a competitor. It's purely about how their customers are behaving in the current economic climate," said McAdams Wright Ragen analyst Sid Parakh.

Microsoft is on track to release an updated operating system, Windows 7, on Oct. 22 and a new version of its Office software in the first half of the 2010 calendar year, but neither of these events are expected to reverse Microsoft's recent fortune.

Microsoft said its profit in the quarter that ended in June sank to $3.05 billion, or 34 cents per share. In the same period last year it earned $4.3 billion, 46 cents per share.

Because some people buying Windows Vista computers now will get free upgrades to Windows 7 when it launches in October, Microsoft deferred $276 million of Windows revenue. That cut its profit by 2 cents per share.

The earnings were also hurt by legal charges, severance charges and the declining value of its investments. Excluding all those items, Microsoft would have beaten Wall Street's expectations by 2 cents per share, according to a Thomson Reuters poll.

In part, Microsoft was able to keep its profit on track because it cut operating expenses by nearly $1 billion from last year.

Microsoft's quarterly sales dropped 17 percent to $13.1 billion. Even if the company had not deferred some Windows revenue, it still would have missed the Street view by a wide margin. Analysts were looking for $14.4 billion in sales.

"It was not a great quarter at all," said Canaccord Adams analyst Peter Misek. "'Wow,' was the response I had when I saw it hit the tape."

The divisions responsible for Windows, Office, and server software, posted sales declines, as did Xbox 360 and Web advertising groups.

Big businesses renewed software license agreements at about the same rate as in the past, Liddell said. But revenue was flat, because many companies have frozen hiring or cut workers, and aren't increasing the number of software licenses they buy.

Corporate customers also bought fewer server computers.

Microsoft's online advertising business reported a wider operating loss. The Entertainment and Devices group, which makes Xbox 360, Zune and mobile phone software, also ended the quarter in the red.

Liddell, Microsoft's CFO, said he thought the company did well, considering the challenges.

"We are a stronger company than we were a year ago," Liddell said. "However, the economy continues to be challenging and we need to lift our game to another level in fiscal 2010."

 

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