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Originally published January 23, 2009 at 12:00 AM | Page modified January 23, 2009 at 1:35 PM

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Microsoft earnings feel sting of weak PC market

Microsoft eked out an uptick in sales during the past quarter despite a crumbling economy and an anemic personal-computer market, which...

Seattle Times technology reporter

Microsoft eked out an uptick in sales during the past quarter despite a crumbling economy and an anemic personal-computer market, which weighed on its flagship Windows business.

In a bid to bring its expenses in line with slowing revenue growth, the company sped up and expanded its earlier cost-cutting plans. And it said it would cut 5,000 jobs over the next 18 months, while adding jobs over that period for a net trim of 2,000 to 3,000 — the first companywide layoffs in Microsoft history.

Microsoft sprang its disappointing earnings announcement early Thursday, getting the bad news out before the stock market opened. Its practice has been to report after the closing bell.

Microsoft stock plunged 11.7 percent, or $2.27, to $17.11 Thursday, its lowest point since Jan. 30, 1998. It recovered slightly Friday, rising 9 cents, or 0.5 percent, to $17.20.

Sales rose 1.6 percent year over year to $16.63 billion in the quarter ended Dec. 31, the second in Microsoft's fiscal 2009. But profit slid 11.3 percent to $4.17 billion and earnings per share fell 6 percent to 47 cents.

The results missed the low end of Microsoft's own guidance, set in October when the company still expected the PC market to grow 10 to 12 percent in the quarter — and also were well below the consensus expectation of Wall Street analysts.

"Our second-quarter results reflect the difficult environment as the global economy continued to deteriorate beyond our expectations, particularly during the month of December," said Chief Financial Officer Chris Liddell.

Analysts were particularly surprised by the degree to which Microsoft overestimated demand for PCs. Market researchers reported PC shipments were essentially flat in the quarter compared with a year ago.

"We knew that there was no way that they could live up to the numbers they had guided for," said Sid Parakh, analyst with McAdams Wright Ragen. "It was pretty evident in PC growth numbers."

Sales in the Windows business were down 8 percent to $4 billion.

The Microsoft Business Division, responsible for the company's other traditional pillar, Office, saw sales inch up 1.9 percent to $4.9 billion. But again, sales of consumer versions of Office declined 23 percent on poor PC sales.

Meanwhile, rival Apple increased its Mac shipments 9 percent in the quarter.

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Microsoft Chief Executive Steve Ballmer acknowledged that Windows had lost "maybe a point of [market] share," but was optimistic about the next version of his company's principal product, Windows 7, particularly given the economy.

"The kind of price premiums that people pay for Macintoshes vs. PCs, I think, will be looked at far more critically by customers, as a number of reviewers have started to note," Ballmer said.

That said, Microsoft was not at all sanguine in its outlook for PC sales. Liddell said PC sales were "likely to remain weak over the second half of our fiscal year" and could be even weaker than the quarter just ended.

Liddell said the uncertainty in the broader economy is so great in the coming six months that Microsoft would not give sales or earnings forecasts for the second half of the current fiscal year, which ends June 30.

A few highlights:

The Entertainment and Devices Division sold a record 6 million Xbox 360s in the quarter but grew revenue just 3 percent to $3.2 billion. The increased hardware sales, which have some of the lowest profit margins in Microsoft's entire product portfolio, also bumped up the company's cost of goods sold.

The Server and Tools business continued its run of double-digit growth, increasing sales 15 percent to $3.7 billion.

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com

Copyright © 2009 The Seattle Times Company

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