Microsoft Sales Fall Way to Short

Microsoft (MSFT) posted its first year-over-year sales decline in its 23 years as a public company Thursday, highlighting the tech sector's challenges as the recession drags on.

The Redmond, Wash., software giant missed Wall Street's third-quarter sales forecast by a wide margin, but met expectations on earnings, excluding one-time charges.

For the quarter that ended March 31, Microsoft earned 39 cents a share, excluding charges totaling 6 cents a share related to layoffs and money-losing investments. That was 17% below the same period last year, its second straight dip in year-over-year earnings per share.

Sales fell 6% to $13.65 billion, well below the $14.09 billion estimate of analysts polled by Thomson Reuters. It marked a historic low for the company. Since going public in 1986, Microsoft had never reported a year-to-year drop in quarterly sales.

"While market conditions remained weak during the quarter, I was pleased with the organization's ability to offset revenue pressures with the swift implementation of cost-savings initiatives," Microsoft Chief Financial Officer Chris Liddell said in a statement.

Though Microsoft did not provide specific financial guidance, Liddell said company officials "expect the weakness to continue through at least the next quarter."

Microsoft shares rose 4% in after-hours trading following the earnings release. During regular session trading, shares rose 0.75% to 18.92.

Investors were likely encouraged that the company preserved EPS through cost-cutting, says Jeff Gaggin, enterprise software analyst at Avian Securities.

Investors also may be enthused about the upcoming release of Windows 7, the company's next-generation PC operating system, Gaggin says. Microsoft said it remains on track to release Windows 7 in fiscal year 2010, which ends in June next year.

"Microsoft had a fairly weak first (calendar) quarter, but I don't think anyone was expecting anything differently," said Toan Tran, an analyst with Morningstar. "What investors are going to focus on now is the upcoming release of Windows 7 and how that might get the Windows business back on track."

The current version of Windows, called Vista, is a "damaged brand," Tran said. Critics have called the software slow, bloated and subject to annoying security alerts. Many PC users have avoided upgrading to Vista and continue to use its predecessor, Windows XP.

Microsoft felt the effects last quarter of the personal computer sales slowdown and corporate tech- spending cutbacks.

Analysts are forecasting year-over-year declines in sales and earnings per share for the next two quarters as well.

[the article was originally published at http://www.investors.com/NewsAndAnalysis/Article.aspx?id=474927]