October 24, 2009 in Business

Microsoft’s cuts help offset sluggish sales

Company posts earnings that top expectations
Jessica Mintz Associated Press
 
Associated Press photo

Computer shoppers read through all the options and compare prices at Best Buy in Springfield, Ill., Thursday after Microsoft launched its new operating system, Windows 7.
(Full-size photo)

SEATTLE – Consumers may be shopping for computers again, but Microsoft Corp. still needs businesses to start doing the same.

Microsoft said Friday its revenue kept falling and its net income dropped 18 percent in the last quarter, partly because of the hesitation of businesses, which are more profitable for Microsoft than consumers are.

Big cost cuts at Microsoft made a difference, though, helping the company deliver earnings well above analysts’ expectations. Its stock surged $1.29, nearly 5 percent, to $27.88 in afternoon trading.

But while the quarterly results looked good to Wall Street, they also showed how much Microsoft is still wrestling with a PC industry that remains much weaker than a year ago.

In the past year the software maker resorted to its first wide-scale layoffs, and in July it said its annual revenue had fallen for the first time since the company went public in 1986.

After skidding for six months, computer shipments rose in the July-September period. But shoppers tended to buy inexpensive laptops and even smaller, cheaper netbooks, which have older and less profitable versions of Windows installed. Many consumers also passed on buying Microsoft’s Office, the package that includes Word, Excel and Outlook, which contributed to a 14 percent total decline in revenue in the quarter.

Businesses watched their spending even more closely. That dragged down Windows results because business-level versions of the operating system are more expensive.

And companies that have cut workers are ordering fewer copies of Office and other Microsoft software commonly used at work.

Chris Liddell, Microsoft’s chief financial officer, said in a conference call that businesses could start replacing aging PCs and servers starting in 2010, “although it could be gradual and occur over a couple of years.”

Other companies, especially Intel Corp., have indicated they expect things to improve faster, in the current quarter.

Microsoft’s earnings in the last quarter dropped to $3.6 billion, or 40 cents per share, though that was much higher than the analysts’ estimate of 32 cents per share. In the same period last year Microsoft earned $4.4 billion, or 48 cents per share.

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