Microsoft Corp. posted a 32% drop in profit and the first decline in quarterly revenue in its 23-year history as a public company
, as the global recession took a toll on nearly every segment of the software company's business.
Four of Microsoft's five business divisions recorded lower sales, including a 16% decline in its flagship Windows business to $3.4 billion. Microsoft executives blamed the drop on a general pullback in spending on PCs by both consumers and businesses. PC shipments fell by 6.5% in the first three months of the year, according to Gartner Inc.
In a conference call with analysts, Microsoft Chief Financial Officer Chris Liddell dispelled hopes that the company's business will soon bottom out, saying the company expects the remainder of the calendar year to "remain very challenging."
Still, Microsoft shares rose 3.7% to $19.61 in after-hours trading because the fiscal third-quarter results were better than some of the worst-case scenarios envisioned by investors, aided in part by aggressive cost-cutting at the company. Shares finished regular trading little changed at $18.92 on the Nasdaq Stock Market.
The Redmond, Wash., company, said total revenue declined 5.6% to $13.65 billion in the quarter ended March 31 from $14.45 billion a year earlier. The decline marks the end of a streak of uninterrupted year-over-year growth that has made Microsoft into one of the largest and richest corporations.
In addition to slumping PC sales, Microsoft faces a challenge from netbooks, the inexpensive laptop computers that are the only segment of the PC business enjoying growth. Microsoft hasn't been able to charge as much for the versions of Windows that are generally bundled with netbooks as it can for software included with other types of PCs.
Microsoft executives said Thursday they believe netbooks didn't steal meaningful sales from more lucrative PCs and that the decline in its Windows business would have been more severe in the absence of the netbook market.
The company reported net income of $2.98 billion, or 33 cents a share, from $4.39 billion, or 47 cents, in the year-earlier period. The latest results included a $420 million charge stemming from impairments to investments and a $290 million charge from severance payments related to layoffs the company announced in January.
Microsoft's revenue missed analysts' expectations by about $500 million, but many investors had privately feared worse.
"I think the fear was a billion-dollar shortfall," said Sandeep Aggarwal, an analyst at Collins Stewart LLC.
In one sign that Microsoft intends to closely manage its costs during the downturn, it lowered the midpoint of its forecast for operating expenses for the fiscal year ending June 30 by roughly $600 million. Earlier this year, it said it would cut 5,000 jobs.
The company said revenue in its business division, which includes the Office and Exchange products, fell 5% to $4.51 billion. Meanwhile, its online services business dropped 14% to $721 million due to weakness in the advertising market.
In a further sign of the challenges Microsoft faces on the Internet, its operating losses from the online services division more than doubled to $575 million. The company is battling to improve its competitive position in Internet search and advertising against Google Inc., but has made little progress by most important measures. The company has continued to hire within its Internet group even as it has made staff cutbacks elsewhere in the company.
The division that includes the Xbox 360 videogame system had sales of $1.57 billion, down slightly from a year ago.
The only segment of Microsoft's business that eked out any growth was its server and tools division, dominated by Windows Server and its SQL database products, which rose 7% to $3.47 billion.
Microsoft has several major product launches nearing that could give its business a lift. The company has said it intends to release Windows 7, the next major version of its operating system for PCs, by January, though people familiar with the matter expect it will arrive on new PCs by October.