By Amy Thomson
April 24 (Bloomberg) -- Microsoft Corp. declined 5 percent in extended trading after it reported an 11 percent drop in third-quarter profit and forecast earnings that may miss analysts' estimates as Windows software sales fell.
Net income dropped to $4.39 billion, or 47 cents a share, from $4.93 billion, or 50 cents, a year ago. Revenue was little changed at $14.5 billion, matching analysts' estimates and disappointing investors looking for more after industry reports showed better-than-expected demand for personal computers.
The world's biggest software maker said sales of Windows for PCs sank 24 percent and revenue from its online advertising unit came in at the low end of its projections. Microsoft's report contrasted with positive comments from chipmaker Intel Corp. and computer company International Business Machines Corp.
``People were expecting more of a blowout,'' said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon. ``It's a decent quarter. It's not a great quarter by any means, and people were expecting a great quarter.''
Earnings in the quarter, which included costs of 15 cents a share for a European Commission fine, beat the 44.5-cent average of analysts' estimates. Profit and sales a year ago were helped by $1.67 billion in Windows and Office software orders held over from the previous quarter for accounting reasons.
Chief Financial Officer Chris Liddell said Microsoft will stand firm on its offer for Yahoo! Inc. and will explore other options, including a proxy fight or abandoning the offer, if no deal is reached by this weekend. Yahoo spokeswoman Diana Wong declined to comment.
Shares Fall
Microsoft declined $1.60 to $30.20 in extended trading after closing at $31.80 at 4 p.m. New York time on the Nasdaq Stock Market. The stock has fallen 11 percent this year.
For this quarter, Microsoft forecast profit of 45 cents to 48 cents a share on sales of $15.5 billion to $15.8 billion. That compares with analyst estimates of 48 cents and $15.5 billion.
The results stoked concern that corporations are tightening their belts as the U.S. economy cools, even after a report from researcher IDC showed PC sales exceeded forecasts in the quarter. PC shipments rose 15 percent, Framingham, Massachusetts-based IDC said this month. Microsoft had forecast as much as 11 percent.
Windows sales fell to $4.03 billion in the quarter. UBS AG's Heather Bellini, the top-ranked software analyst by Institutional Investor, predicted $4.3 billion. Sales of Office word-processing and spreadsheet applications trailed forecasts slightly as well.
Windows Concern
Chief Executive Officer Steve Ballmer has sought to bolster sales by selling more higher-priced versions of Windows, the operating system that runs more than 90 percent of the world's PCs. Those gains were limited last quarter.
More Windows sales came from emerging markets, where prices are typically lower, Liddell said in an interview. Piracy rates also picked up in Asia, particularly China, Liddell said.
``That means that we are seeing revenue growth relative to unit growth isn't as strong,'' he said. The company expects PC growth of as much as 13 percent for fiscal 2008.
Microsoft said total sales in the year that starts in July will rise to between $66.9 billion and $68 billion, beating the $66.6 billion average of estimates in a Bloomberg survey. Profit will increase to between $2.13 and $2.19 a share, topping an estimate of $2.11.
Online Business
In the online business, where Ballmer is seeking to build sales by bidding for No. 2 search engine Yahoo, the loss widened to $228 million. Sales rose 40 percent to $843 million. Microsoft had forecast 40 percent to 45 percent growth. Google Inc.'s revenue, excluding sales passed on to partner sites, climbed 46 percent in the period, to $3.7 billion.
Microsoft has options for building out the online business without Yahoo, including other investments and partnerships, Liddell said on a conference call. Talks between the two companies were characterized by ``unrealistic expectations of value,'' and have been ``anything but speedy,'' he said.
``Yahoo continues to lose search share and profit continues to decline year on year,'' Liddell said on the call. ``We have been clear that speed is of the essence for the deal to make sense.''
Yahoo CEO Jerry Yang spurned Microsoft's advances, rejecting the $31-a-share bid and approaching rivals such as Time Warner Inc.'s AOL. Ballmer may begin a proxy contest to oust Sunnyvale, California-based Yahoo's board as soon as this weekend.
The acquisition, which would be the largest in Microsoft's history, may help the company take a bigger chunk of the $41 billion market for Internet ads away from Google.
Xbox Growth
One bright spot in the quarter came from the Xbox video-game unit, where sales growth was almost double some forecasts. The business posted its third straight quarterly profit and revenue rose 68 percent to $1.58 billion. Microsoft predicted growth of 25 percent to 35 percent.
Ballmer has lined up exclusive titles such as ``Halo 3'' and ``Mass Effect'' to win users from Nintendo Co.'s Wii system and achieve the first annual profit in the Xbox unit.
It was ``an outstanding Xbox quarter,'' said Canaccord Adams Inc. analyst Peter Misek in Toronto. ``It's just amazing that a company this size is being driven by video games.''
Microsoft has cut the price of the Xbox 360 console in Europe at least twice in the past year, prompting sales to more than double, Chris Lewis, vice president of the company's interactive business in Europe, said this month.
To contact the reporter on this story: Amy Thomson in New York at athomson6@bloomberg.net
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