Profits dip by almost a third for Microsoft

Published on Friday 26 January 2007 11:59

PROFITS at software giant Microsoft have plummeted by almost a third following the firm's problems with the much-delayed Windows Vista operating system.

The company, the world's largest software maker, said profits in its second financial quarter, to December 31, were at 1.3 billion, compared to 1.86bn for the same period a year before.

The drop amounts to a 28 per cent fall in earnings and comes despite revenue growth. Sales rose by six per cent in the period, to 6.4bn.

The firm has also moved to lower its expectations for sales of the Xbox 360 games console, which is seen as being a bid to challenge Nintendo and Sony in the competitive 30bn video game market.

It is aiming to sell only 12 million of the Xbox machines by the end of the fiscal year on June 30 - reducing its previous target of 13-15m.

Chief financial officer Chris Liddell said: "We are just being cautious about the second half. It was always going to be a slow half. We've done very well in the first half. There is a reasonable amount of inventory in the channel."

Microsoft had beaten its 10 million target for the console by the end of 2006, shipping 10.4 million units. However, recent launches by Sony and Nintendo are expected to hit sales.

Microsoft also said that lowered expectations for the Xbox console would be offset by better sales of its premium Windows operating system, Microsoft Vista. Although the new operating system and the upcoming Microsoft Office 2007 do not hit the consumer market until next Tuesday, they have been available to businesses since November 30.

Microsoft's "client" division, responsible for Windows, posted a 25 percent drop in sales to1.3bn. And the business division, which includes Office, saw a five percent drop to 1.8bn. The falls were expected because Microsoft heavily deferred Windows and Office revenue from the second quarter to the current period - to account for coupons that recent computer buyers received, letting them upgrade their existing software to Vista and Office.

The deferral trimmed 88m from second-quarter results, but without it, revenue would have leaped 20 per cent.

The company's online business also struggled again, losing money for the fourth straight quarter with Microsoft scaling back its revenue outlook for the unit in the second half.

However, the overall revenue gain that the firm enjoyed is being attributed to a successful entertainment division. The Xbox title game Gears of War was December's top-selling game and attributed to a 76 per cent jump in revenue of the division in the quarter to 1.5bn.

Also in the entertainment division is Microsoft's Zune music player, which hit the market in mid-November to soft reviews. Liddell said the company remains confident it can sell one million Zunes by the end of June.

The results gave analysts cause to be enthusiastic about the firm's short-term prospects.

Kim Caughey, an analyst at Fort Pitt Capital, said: "We're expecting the next couple of years for Microsoft to really hit its stride in terms of cash generation."