Microsoft sales and earnings drop less than expected

Deferral of OS revenue ahead of Windows 7 launch hit results; Xbox earnings sparkled

Microsoft Corp. reported that its revenue was down 14% year on year for its first fiscal quarter and that its quarterly net income was down 17%, but it still beat analysts' expectations on both counts.

The figures were dragged down by deferral of revenue from sales of Windows 7 to PC manufacturers ahead of the operating system's launch on Thursday, the company said today.

Overall revenue totaled $12.92 billion for the quarter that ended Sept. 30, down from $15.06 billion a year earlier. Net income fell to $3.57 billion, for earnings per share of 40 cents, from $4.37 billion a year earlier.

Analysts polled by Thomson Reuters had forecast revenue of $12.32 billion and earnings per share of 32 cents.

The $1.47 billion in deferred revenue would not have been enough to maintain sales in the company's Windows and Windows Live division, where revenue fell to $2.62 billion, down $1.66 billion from a year earlier.

However, Microsoft's chief financial officer, Chris Liddell, put a bright face on the company's financial results.

"We are very pleased with our performance this quarter and particularly by the strong consumer demand for Windows," he said.

If Microsoft had not had to defer Windows 7 sales, profit would have gone up 8%, it said.

Sales in Microsoft's servers and tools division remained steady at around $3.4 billion, with operating income there up 23% to $1.28 billion, while operating profit in the company's entertainment and devices division, which makes the Xbox gaming system, doubled to $312 million on sales that were steady at $1.89 billion.

Microsoft's results were buoyed by consistent strength in consumer PC sales, including the rise of netbooks, Liddell said during a conference call Friday. "What I think we're seeing is the robustness in the concept of a PC. It's something people want to spend money [on], even in a recession."

But weakness in computer purchasing by businesses has posed "a significant negative," he said. "That can't continue forever. Eventually those PCs wear out and need to be replaced."

Right now, corporate customers are "playing out" budgets that were set late last year when the crisis was at its worst, so Microsoft does not believe business spending will pick up until 2010, according to Liddell. "We're all waiting to see how the economy rebounds and how well it does," he said. "We're not seeing a large rebound but certainly as we go into next calendar year we'll see businesses spending again, and we'll be raised with that."

Microsoft expects "flattish" performance on the services side for the rest of its fiscal year, he added.

As for Windows 7, Microsoft has received good anecdotal feedback from corporate customers, but expects companies won't start upgrading until next year, Liddell said.

"Certainly all the early signs are good at this stage," he said. Pre-orders for the OS have been "extremely good," and the vendor is anticipating strong retail sales through the holiday season, he added.

Microsoft shares were up about $1.81 in midday trading Friday to $28.40.

This story, "Microsoft sales and earnings drop less than expected" was originally published by IDG News Service .

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