Microsoft misses, but it could be worse

July 18, 2008, 12:22 AM UTC
Earnings missed by a penny, but there’s no reason to panic at Microsoft headquarters. Image: Microsoft

It looks like the U.S. economic slowdown finally caught up with Microsoft.

Though it typically over-delivers on its earnings promises, this time the Windows maker missed the quarter ended June 30 by a penny a share. The culprits: disappointing consumer sales of Microsoft Office and the cost of competing with Google . Adding to the angst, the company’s financial projections for fiscal 2009 were slightly less rosy than investors had hoped. Management projected profits of 47 cents to 48 cents on revenue of $14.7 billion to $14.9 billion, while analysts wanted 49 cents on revenue of $15.04 billion.

Wall Street’s rebuke to its Thursday earnings report came swiftly. Microsoft shares dipped more than 6 percent after hours to less than $26 per share, erasing the week’s gains and flirting with where the stock traded back in the fall of 2006.

Is it crisis time in Redmond? Hardly. True, falling stocks are a bummer, and Microsoft has lost more than 25 percent of its value since its early November high. But the company is still the richest tech company on the planet, with a market cap hovering around a quarter trillion dollars and a war chest so rich that it paid off a $1.5 billion fine to the European Union last quarter the way most of us pay speeding tickets.

Though we’re not witnessing Microsoft’s decline, there were a few knotty spots that clearly irked analysts on the quarterly conference call. Chief Financial Officer Chris Liddell blamed soft retail sales of the higher-end version of Office for a slight revenue shortfall in the business division, which makes one wonder whether improved online alternatives are poaching customers.

Liddell also said in the coming years Microsoft will continue using unconventional methods to lure online advertising business away from Google. Among them: offering cash rebates to consumers who search and buy items through its search engine – one of the practices that now has the division chalking up hundreds of millions of dollars in losses. This, despite the fact that the online ad sector is having its own headaches, which showed up in reaction to Google’s earnings report Thursday. “It is going to be an investment-heavy area,” Liddell said. “I can’t promise you that you’re going to see a massive turnaround in the short term.”

But the bright spots for Microsoft were arguably more important. Consider that this fiscal year its Windows Vista operating system has been panned as a disaster, its sequel to the Zune music player has barely sold at all and its attempts to buy Yahoo have gone nowhere. The company still banked $4.5 billion in profit for the quarter, led by some of the products that are under-performing.

Things could be worse for a company that doesn’t have Apple’s hot products or IBM’s (IBM) worldwide services organization. Surging global demand for PCs and Microsoft’s diverse software portfolio provide a nice cushion. And though the stock took a hit, Google suffered a beating from its own earnings miss – a fact that Liddell felt free to allude to several times.