Total sales at the software maker were up a marginal 1.6% year over year in the second quarter, to $16.63 billion, but Microsoft's net income slumped 11% during the period, to $4.17 billion. Earnings per share fell 6% to 47 cents. Analysts surveyed by Thomson Reuters were, on average, expecting the company to post EPS of 49 cents.
The overall numbers were not apocalyptic, but Microsoft's second-quarter report revealed serious problems in some of the company's most important business lines.
Revenues from sales of the Windows operating system dropped 8%, to $3.98 billion. In its report, filed Thursday with the Securities and Exchange Commission, Microsoft blamed the decline on "PC market weakness and a continued shift to lower-priced Netbook PCs." Netbooks are inexpensive, low-powered laptops used mostly for e-mail and Web surfing. Many models are not capable of running Vista, the current version of Windows.
"We are not immune to the effects of the economy," Microsoft CEO Steve Ballmer said in a statement.
But Windows' problems can't be blamed entirely on the recession. Many consumers and businesses have rejected the OS, launched in January 2007, because of its steep hardware requirements, intrusive security measures, and incompatibility with older software.
By contrast, Apple earlier this week reported that sales of its Macintosh computers rose 9% in the most recent quarter, despite the economic slump. Worsening the comparison with Apple, sales of Microsoft's Zune MP3 player plunged 54% in the last quarter, while iPod sales increased 3%.
Microsoft's quarterly report revealed trouble in other key segments. Office sales to businesses rose 7%, but sales of the desktop productivity package to consumers were off 23%. Office has been hit by competition from low-cost or free alternatives, such as IBM's Lotus Symphony suite.
Online advertising sales increased 7% to $664 million, but overall revenue at Microsoft's Internet unit were flat. Meanwhile, the group posted a $471 million operating loss, nearly double the loss from a year ago. Microsoft is hoping to catch Google in the search market but efforts to date, including last year's $1.2 billion acquisition of Fast Search & Transfer, have borne little fruit.
On the upside, Microsoft said sales of server software and related tools increased 15%, to $3.74 billion, on the strength of corporate demand for Windows Server 2008 and SQL Server 2008.
Microsoft is taking drastic steps to deal with the malaise. The company on Thursday announced that it would cut 5,000 jobs across the board in departments ranging from IT to human resources. 1,400 of those positions will be eliminated by the end of the month, the company said.
Microsoft, which didn't offer future guidance, also said it would curtail spending on travel, marketing and other areas with an eye to saving $1.5 billion annually. It's also eliminating merit raises.
Shares of Microsoft were off more than 8% in midday trading Thursday.