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Microsoft earnings drop, revenue off 6%

Microsoft fell short of analyst expectations for its third quarter, blaming the most difficult economic conditions the company has faced in its history.

For the period that ended March 31, Microsoft reported revenue of $13.65 billion, down 6% compared with the same quarter last year and below the $14.09 billion that analysts had predicted.

Diluted earnings per share were 33 cents, down 30% over last year and below the 39 cents per share analysts had expected. Excluding a charge related to severance payments for layoffs and another for impairments to investments, the earnings would have met analyst expectations, Microsoft said.

Microsoft's operating income for the quarter was down just 3%, hitting $4.44 billion, compared with the same period last year.

The business market continues to drag down Microsoft's sales, said Chris Liddell, the company's chief financial officer. “Globally, business hardware purchases continued to slow and severely impacted traditional license sales in client, [the] Microsoft business division, and server and tools” he said, referring to three groups at the company that were affected by declining software license sales.

Revenue from the client group, which includes Windows, dropped to $3.4 billion from $4 billion last year. While that was because of weak PC sales, the decline was offset somewhat by increased netbook sales. However, Microsoft earns less from Windows licenses on netbooks, which lowered the average selling price of the software.

Microsoft did not announce any layoffs Thursday, contrary to at least one analyst's prediction. In January it laid off 1,400 people and said a total of 5,000 would be let go over the following 18 months.

Microsoft credited its annuity business, which includes subscription fees and multiyear contracts, for keeping sales afloat. “Our annuity business is clearly a bright spot,” Liddell said.

The current quarter, which ends in June, will be critical to discovering whether such ongoing contracts can continue to bolster earnings for the company. Many of those contracts are up for renewal during that quarter.

Lately, the renewals have been roughly in line with the value of the previous contracts, which is a bit of a disappointment for Microsoft, Liddell said. In the past, when companies renewed contracts, they typically bought more seats and sometimes more products. These days, even when Microsoft manages to sell additional products, the gains are usually offset by a decline in the number of seats purchased, due to customer downsizing.

Microsoft's online services business, which includes its struggling search operations, posted an operating loss of $575 million. Its entertainment and devices division, which includes the successful Xbox business as well as Windows Mobile and the Zune, reported an operating loss of $31 million.

The company once again did not offer revenue or profit guidance for the next quarter, but it said it doesn't expect to report particularly good news.

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