Microsoft’s profit slips 11%

SEATTLE — Microsoft Corp. said Thursday its fiscal third-quarter profit fell 11 percent from a year earlier, when the software maker reported more than $1 billion in deferred revenue tied to delays in the launch of the Windows Vista operating system.

The earnings report didn’t affect the software maker’s stance on its bid to buy Web portal Yahoo Inc.

In a conference call, Chief Financial Officer Chris Liddell broke from the standard discussion of results to say Microsoft is prepared to go hostile or walk away from its offer if Yahoo doesn’t agree to a deal by this weekend.

Microsoft said its net profit for the three months ended March 31 fell to $4.39 billion, or 47 cents per share, from $4.93 billion, or 50 cents per share, in the same period last year.

The results still beat Wall Street’s expectations. Analysts surveyed by Thomson Financial forecast a profit of 44 cents per share.

But investors, chewing over the company’s guidance and a drop in sales in the divisions that produce Windows and Office, sent shares down $1.47, or 4.6 percent, to $30.33 in after-hours trading.

Earlier in the day, the stock had gained 35 cents, or 1.1 percent, to close at $31.80.

Revenue edged up to $14.45 billion from $14.4 billion in the year-ago quarter. Analysts were looking for $14.4 billion in sales.

“Despite a difficult economic environment, it was a very good performance,” Liddell said in an interview.

Sid Parakh, an analyst for McAdams Wright Ragen, called the quarter “generally OK,” with better than expected earnings per share but fourth-quarter guidance that came in “a little weak.”

Sales in the division responsible for Windows fell 24 percent to $4.02 billion. Microsoft said it has sold 140 million Vista licenses since the operating system launched over a year ago, including 40 million since its last update in January.

Even taking into account the tough comparison to the year-ago quarter, when Microsoft booked $1.67 billion in deferred Vista revenue, Parakh said sales in the segment sank more than expected. In part, he attributed the miss to PC shipments, which didn’t grow as fast as Microsoft had predicted.

The shortfall may also have come from the effect of software piracy in the quarter. The company’s crackdown on unlicensed software boosted Microsoft’s revenue above and beyond PC shipment growth in the first and second quarters of the fiscal year, but in the third quarter, Liddell said a spate of sales of computers with unlicensed software in China cut into the bottom line.

Sales in the segment that sells the Office productivity suite and other business applications edged down 2 percent to $4.75 billion from a year ago. Liddell said weak sales of Office to consumers and in Japan overall hurt the segment.

Server and tools sales rose 18 percent to $3.3 billion, helped by the launch of new versions of Windows Server and other major software franchises.

Revenue from the division responsible for the Xbox 360 video game system ballooned 68 percent to $1.58 billion, which Microsoft attributed to robust demand for game consoles.

Microsoft’s online services business, which makes money primarily by selling advertising online, saw sales rise 40 percent to $843 million, but the division widened its operating loss in the quarter.

Microsoft trails far behind market leader Google Inc. in online ad sales, and made an unsolicited offer in February to buy Yahoo as a way to close the gap.

Yahoo has said the cash and stock offer — at the time valued at $44.6 billion, but worth $44.06 billion based on Thursday’s closing share price — is too low.

During the call, Liddell said that unless progress was made this weekend, Microsoft “will reconsider our alternatives,” which include taking the offer directly to Yahoo’s shareholders or withdrawing its proposal.

“With or without a Yahoo combination, Microsoft is focused on the online advertising market,” Liddell said.

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