Microsoft's Windows, Office profits slip again

Microsoft Corp.'s profits from its Windows operating system fell for the third quarter in a row, the company reported on Thursday, while profits from its Office productivity suite fell for the second straight quarter.

No relief is expected next quarter, Microsoft's chief financial officer said during a conference call after the fiscal third-quarter earnings were released. But one analyst said Microsoft's sales may start picking up again by year's end, boosted by corporate renewals.

Operating income for the Windows client division was $2.5 billion in the third quarter, which ended March 31, down 19% from the year before.

Operating income in Microsoft's business division, of which the majority of the revenue comes from sales of Office, fell 8% year over year to $2.9 billion.

In its earnings release and an accompanying PowerPoint presentation, Microsoft blamed decreased sales of PCs to businesses for the Windows shortfall, combined with lower profits per PC on the consumer side as a result of fast-rising netbooks, which use the less profitable Windows XP.

On Office, Microsoft cited slumping computer sales, including falling sales of Apple Macs.

"I didn't see any trends at the end of the quarter that would encourage me to think that we have hit the bottom," Microsoft CFO Chris Liddell said. "We expect broadly the same trends in [fiscal] Q4 as we had with this Q3."

However, Matt Rosoff, an analyst at independent firm Directions on Microsoft, predicted Windows and Office sales will pick up in the new fiscal year. He said that enterprises, motivated by the upcoming Windows 7 and Office 2010, will start re-signing their volume-license agreements.

Windows 7's expected release later this year will also likely result in a "pretty good bump up in retail upgrade sales" among consumers who are now holding onto Windows XP or using Vista but eager to upgrade, Rosoff said.

"Windows Vista was received poorly enough and 7 is getting good enough reviews that I think there will be a lot of consumers doing in-place upgrades [to Windows 7]," he said.

Despite consistently poor reviews of Vista from its launch, Microsoft's revenues and profits for Windows did not start falling until late last year, as the recession and the rise of low-cost netbooks took their toll.

During its second-quarter earnings call, in which it announced 5,000 layoffs, the company reported that its operating income for Windows and its business division fell 13% and 2%, respectively.

Income for its Windows client OS also fell 4% year over year in its fiscal first quarter, which ended Sept. 30, 2008.