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Microsoft's Crash Landing


Company reports first drop in earnings since its founding.

Microsoft (MSFT) reported its first year-over-year drop in quarterly revenue since the company went public in 1986.

The drop reflects the sour economy, cutbacks in corporate spending and growing consumer preference for netbooks - low-cost computers that use a cheaper version of Windows.

"While market conditions remained weak during the quarter, I was pleased with the organization's ability to offset revenue pressures with …cost-savings initiatives," Chris Liddell, Microsoft's chief financial officer, said in a prepared statement. "We expect the weakness to continue through at least the next quarter."

For the company's third quarter ended March 31, Microsoft said revenue fell to $13.65 billion from $14.45 billion, a decline of 6%. Net income declined to $2.98 billion, or $0.33 a share, from $4.39 billion, or $0.47 for the same period a year ago - a 32% drop.

Analysts expected the software giant to earn $0.39 a share on revenue of $14.1 billion, excluding one-time charges.

In response to lower earnings, Microsoft restated plans to cut as many of 5,000 jobs by the middle of next year in an effort to save $1.5 billion a year in operating costs.

In addition, Microsoft plans to reduce travel expense, delay office expansion and pay less for contract workers.

Investors seemed encouraged by Microsoft's cutting measures and set the stock as much as 5.9% higher in after-hours trading Thursday. In mid-day trading Friday, the company's stock is up $1.31, or 6.92%, to $20.23 a share.

Last week, Intel's (INTC) Chief Executive Officer Paul Otellini, said that "the worst is now behind us."

But in a conference call to analysts, Liddell said, "[Results] stopped getting worse, but that's different from…getting better."

That suggests there will be no immediate turnaround.

Microsoft faces stiff challenges. Sales in its core Windows business fell to $3.4 billion from $4 billion a year ago, and profit fell 19% to $2.5 billion. Microsoft says PC sales fell 7% to 9% in the third quarter. Excluding the increasingly popular netbooks, PC sales fell 15% to 17%.

Netbook sales may not be Microsoft's salvation because it ships a discounted version of Windows XP -- an older operating system -- on netbooks.

However, it appears many customers buy netbooks to supplement existing desktops, creating new revenue for Microsoft. Apple (AAPL) and Google (GOOG) are expected to introduce netbooks soon, and are likely to take a bite out of Microsoft's sales in the sector.

Microsoft's search business competes with Google and Yahoo (YHOO). The slumping advertising market cut Microsoft's ad sales to $721 million in the third quarter from $843 million a year ago. Talks of a partnership with Yahoo continue.

Microsoft offers reduced prices on server software to corporate customers. But the company will face increased competition from Oracle (ORCL) - especially after its recent $5.6 billion acquisition of Sun Microsystems (JAVA).
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