Microsoft profit up 2 percent, but outlook soft

[October 24, 2008]  SEATTLE (AP) -- Microsoft is still churning out big profits, but its decision to trim its sails shows that even the world's largest software maker is feeling the effects of the choppy economy.

Microsoft Corp. said Thursday its fiscal first-quarter profit edged up 2 percent, buoyed by corporate customers that renewed licenses for servers and other business programs.

But Microsoft's guidance for the current quarter was weaker than Wall Street was expecting. Its shares rose then dipped in extended trading as investors digested the news.

"We, like most companies, saw a slowdown at the tail end of the quarter in particular," Chief Financial Officer Chris Liddell said in an interview. "We're now taking a more conservative stance on the balance of the year."

Liddell said the worst hit among Microsoft's customers in the just-concluded quarter were small- and medium-sized businesses that "perhaps are more affected by the credit squeeze and who perhaps make decisions on a month-by-month basis."

In a conference call with investors, Liddell said Microsoft will "tailor our business to whatever the economy brings."

The CFO said Microsoft will trim operating expenses by $400 million to $500 million in the fiscal year by slowing hiring, cutting marketing expenses and spending less on building the massive data centers that prop up its online business.

"Microsoft isn't known for great spending restraint," said Edward Jones analyst Andy Miedler in an interview. "It is clear that Microsoft is now watching its expenses very closely, which is important in this challenging economy."

In the three months that ended Sept. 30, Microsoft's earnings rose to $4.37 billion, or 48 cents per share, from $4.29 billion, or 45 cents per share in the same period last year.

Sales improved 9 percent to $15.1 billion.

Microsoft beat Wall Street's expectations on both counts. Analysts, on average, predicted the Redmond, Wash.-based company would earn 47 cents per share on $14.8 billion in sales, according to a Thomson Reuters survey.

The software maker highlighted a 20 percent third-quarter jump in sales of multiyear contracts to businesses, which helped boost revenue for Microsoft's server software group and the division that makes Office productivity software.

The server group's profit increased 20 percent to $1.2 billion, while the division responsible for Office software saw earnings jump 23 percent to $3.3 billion.

The Windows division's profit, on the other hand, slipped 4 percent to $3.3 billion. Microsoft, which recently launched a massive new advertising campaign to trumpet Windows' virtues, attributed part of the decline to higher marketing expenses.

The company also blamed some of that decrease on the rising popularity of netbooks, a class of small, inexpensive laptops that on the whole aren't powerful enough to run the souped-up, pricer versions of Windows Vista.

Sid Parakh, an analyst for McAdams Wright Ragen, said Microsoft also drops the price it charges PC makers for installing Windows on laptops that cost so little.

Microsoft also said revenue from PC makers like Dell Inc. and Hewlett-Packard Co. sank 1 percent as those companies bought a smaller percentage of higher-priced "premium" versions of Windows Vista.

Microsoft's online division widened its loss in the quarter to $480 million from $270 million last year as the company continues to invest heavily in the unit. Liddell said Web advertising revenue improved 15 percent, with search ads bringing in more than graphical "display ads." That's much stronger than the 1 percent gain Yahoo Inc. reported this week in its online ad revenue.

Liddell said Microsoft's outlook for the current quarter was lower than expected because of an across-the-board slowdown, not pain in one particular area. Microsoft expects to earn 51 to 53 cents per share, on sales of $17.3 billion to $17.8 billion.

Analysts were predicting a profit of 55 cents per share on $18 billion in sales.

Shares of Microsoft slipped 21 cents, or almost 1 percent, to $22.11 in after-hours trading. In the regular session they added 79 cents, or 3.7 percent, to end at $22.32.

[Associated Press; By JESSICA MINTZ]

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