Microsoft cuts costs, says Windows 7 on track

SEATTLE (Reuters) - Microsoft Corp’s quarterly profit fell 32 percent, but its shares rose as investors welcomed continuing efforts to cut costs and news that the release of its Windows 7 operating system is on track.

The world’s top software maker offered no profit forecast on Thursday, after withdrawing its outlook in January, but did say it expected weakness in the personal computer, server and hardware markets to continue for at least another quarter.

“While we would all like to think that our recovery will be soon and painless, we unfortunately believe that it will be slow and gradual,” Chief Financial Officer Chris Liddell said on a conference call.

Microsoft’s report, following strong earnings from Apple Inc and Google Inc this month, broadly pleased analysts, some of whom were braced for worse.

While the company reported a 6 percent drop in revenue for the March quarter, marking the first year-on-year decline in Microsoft’s 34-year history, it also managed to cut operating expenses by a bigger 9 percent.

“It’s good to see that they are controlling their costs because that’s within their sphere of control. They can’t really do a lot about demand,” said Kim Caughey at money manager Fort Pitt Capital Group.

“They have a nice product refresh cycle coming up, which should allow them to maintain their market share,” she added, referring to the new Windows 7 that will help Microsoft put the unpopular Vista operating system behind it.

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Microsoft, which released the beta test version of the new Windows during the quarter, said it felt very good about the testing and the system was on track for a fiscal 2010 launch, which could mean as early as July this year.

“The best of all possible worlds would be that it’s ready for back-to-school, which is the July-August time frame,” said Caughey.


Microsoft shares rose 3.7 percent in after-hours trading to $19.62, after closing at $18.92 on Nasdaq. The stock has risen over 30 percent from a more than 10-year low of $14.87 in early March. However, it is still essentially flat for the year after ending 2008 at $19.44.

Curtis Shauger, an analyst at Caris & Co, said Microsoft’s stock has been “pretty cheap” and investors were expecting profit margins to be hit.

“Some of the cost cuts they have done are having positive impact,” he said. “People were fearing far worse.”

Microsoft Corporation Chief Executive Officer Steve Ballmer gestures as he speaks during a news conference after meeting Polish Economy Minister Waldemar Pawlak (not pictured) at the Economy Ministry building in Warsaw April 23, 2009. REUTERS/Kacper Pempel

Microsoft said it was targeting $26.7 billion to $26.9 billion in operating expenses for the fiscal year, which ends June 30. That is below the $27.4 billion target it gave three months ago.

In January it said it would slash up to 5,000 jobs, or just over 5 percent of its 96,000 staff, over 18 months, in a bid to save $1.5 billion a year. It cut 1,400 staff right away.

In contrast to Intel Corp, which said last week that the worst was over in the PC market, Microsoft’s Liddell said there was no sign at the end of the quarter that the bottom had been reached.

But the CFO said Microsoft was ready to launch new products into the soft market, looking to capitalize on the recovery when it comes.

Microsoft, based in Redmond, Washington, reported fiscal third-quarter profit of $2.98 billion, or 33 cents per share, compared with $4.39 billion, or 47 cents per share, in the year-ago quarter.

Excluding costs of the recent layoffs and charges for impaired investments, Microsoft reported profit of 39 cents per share. That met analysts’ average estimate, according to Reuters Estimates.

Sales fell 6 percent to $13.65 billion. Analysts were expecting $14.1 billion, on average.

Reporting by Bill Rigby, Anupreeta Das, Tiffany Wu, Gina Keating and Alexei Oreskovic; Editing by Richard Chang