Microsoft happy with its gentleman's C

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Microsoft Corp's (MSFT) earnings announcement today reminds me of a story I heard years ago. A seventh grader steps off the school bus and marches into the house beaming. His mother asks him why he is so happy. He replies: "Great news mom, I got a 70!"

What does this have to do with Microsoft? This morning it reported that its first-quarter net income fell 18 percent to $3.6 billion and sales dropped 14 percent to $12.9 billion. Microsoft responded with all the enthusiasm of that seventh grader, noting, "We are very pleased with our performance this quarter."

Wall Street was similarly excited about Microsoft's "C" grade. How so? It's simple really, analysts expected worse. Specifically, Microsoft's profits of 40 cents a share were 25 percent more than analysts expected and its sales topped their forecasts by a whopping five percent.

The good news for Microsoft is that its cost cuts boosted its bottom line in some businesses despite weak sales. In January, Microsoft announced its first mass layoffs -- a move that will wipe out 5,000 jobs there by mid 2010. Although sales were flat at its entertainment and device division, which includes the Xbox 360 and the Zune HD, profit there roughly doubled. And though its server unit's revenues flat-lined, its profits rose 23 percent.

Cost-cutting did not save all its divisions, though. Its online services business -- which includes MSN -- lost $480 million in the quarter as sales there fell six percent.

Meanwhile, Windows sales plunged 38.8 percent -- slicing profits in half in that division.

Does this sound good to you? The market loves it -- boosting its stock 8.8 percent in early trading to $28.89. But that's down 51 percent from its all time high of $58.38 in December 1999.

If that's not a 70, what is?

Peter Cohan is a management consultant, Babson professor and author of nine books, includingCapital Rising (due in June 2010). Follow him on Twitter. He has no financial interest in Microsoft securities.

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