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Windows Sales Off 16% As Microsoft's Reports Sharp Profit Decline

Revenue and earnings fall as the software maker deals with recession and vigorous competition.

Faced with a slumping economy, new sources of competition, and a staple product that turned out to be a dud, Microsoft on Thursday reported one of the worst financial quarters in its history.

The company said total revenue for its third fiscal quarter fell 6% year over year, to $13.6 billion, while net income, including $710 million in restructuring and investment charges, sank 32% to $3 billion. Earnings per share came in at 33 cents, compared with 47 cents in the year prior.

"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-saving initiatives," Microsoft CFO Chris Liddell said in a statement. He added that he expected the downturn to last "through at least the next quarter."

Microsoft earlier this year said it would cut 5,000 jobs to reduce costs. But it's more than market conditions plaguing the software maker's balance sheet.

Vista, the current edition of the company's core Windows operating system, has been met with jeers by corporate and home computer users alike. Surveys show that only a handful of large enterprises have upgraded their PCs from the older Windows XP OS to Vista. Complaints range from Vista's hardware requirements to its intrusive security measures and incompatibility with older software.

Microsoft also faces competition from open source developers and a resurgent Apple, as well as from Google's efforts to expand beyond search into operating systems and applications.

Partly as a result, Microsoft's client division, which hosts Windows, posted a 16% drop in sales, to $3.4 billion, in the quarter. Microsoft is hoping that Vista's successor, Windows 7, will reverse the tide. Windows 7 is expected to be released later this year or early next.

Microsoft also didn't fare well in other areas during its third quarter. Revenue from Internet services fell 14%, to $721 million -- a sign that the company is losing more ground to Google in the race for eyeballs on the Web and associated sales.

Microsoft's Business Division, which mainly sells the Office productivity suite, saw a 4.7% sales drop to $4.5 billion. Sales in the Xbox-focused Entertainment and Devices unit also slipped 4.7%, to $1.6 billion. The only gain came in Microsoft's server group, where sales increased 7% to $3.4 billion.

Microsoft said it expects to record operating expenses of between $26.7 billion and $26.9 billion for the full fiscal year.

InformationWeek has published an in-depth report on Windows 7. Download the report here (registration required).

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