Microsoft earnings down over last year

Software giant cites weaknesses in global PC and server markets, believes recovery will be slow and gradual

Microsoft missed analyst expectations for its third fiscal quarter, blaming the most difficult economic conditions the company has faced in its history.

For the period ending March 31, Microsoft reported revenue of $13.65 billion, down 6 percent compared to the same quarter last year and below the $14.09 billion that analysts had predicted.

[ In other financial news this week, Apple reported that profits jumped 15 percent on the strength of the iPhone and iPod Touch. | Keep up on the day's tech news headlines with InfoWorld's Today's Headlines: First Look newsletter and InfoWorld Daily podcast. ]

Earnings per share were $0.33, down 30 percent over last year and below the analyst forecast of $0.39 per share. Excluding a charge related to severance payments for layoffs and another for impairments to investments, the earnings would have met analyst expectations, Microsoft said.

Microsoft's operating income for the quarter was down just 3 percent from the same period last year, at $4.44 billion.

The business market continues to drag down Microsoft's sales, said Chris Liddell, the company's chief financial officer. "Globally, business hardware purchases continued to slow and severely impacted traditional license sales in Client, Microsoft Business Division and Server & Tools," he said, referring to three groups at the company affected by software license sales.

Revenue from the Client group, which includes Windows, dropped to $3.4 billion from $4.0 billion last year. While that was due to weak PC sales, the decline was offset somewhat by increased netbook sales. However, Microsoft earns less from Windows licenses on netbooks, which lowered the average selling price of the software.

Microsoft did not announce any layoffs Thursday, contrary to at least one analyst's prediction. In January it laid off 1,400 people and said a total of 5,000 would be let go over the following 18 months.

Microsoft credited its annuity business, which includes subscription fees and multiyear contracts, for keeping sales afloat. "Our annuity business is clearly a bright spot," Liddell said.

The current quarter, which ends in June, will be critical to discovering whether such ongoing contracts can continue to bolster earnings for the company. Many of those contracts are up for renewal during that quarter.

Lately, the renewals have been roughly in line with the value of the previous contracts, which is a bit of a disappointment for Microsoft, Liddell said. In the past, when companies renewed contracts they typically bought more seats, and sometimes more products too. These days, even when Microsoft manages to sell additional products, the gains are usually offset by a decline in the number of seats purchased, due to customer downsizing.

Microsoft's Online Services Business, which includes its struggling search operations, posted an operating loss of $575 million. Its Entertainment and Devices division, which includes the successful Xbox business, as well as Windows Mobile and the Zune, reported an operating loss of $31 million.

The company once again did not offer revenue or profit guidance for the next quarter, but it said it doesn't expect to report particularly good news.

"We 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 Liddell. "During the quarter it stopped getting worse, but that's different than starting to get better, and I think that'll be the same for the fourth quarter."

He added that he expects the rest of the calendar year to follow that trend. "While we'd all like to think the recovery will be soon and painless, we unfortunately believe it'll be slow and gradual," he said.

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