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Windows 7 Plan Lowers Microsoft Profit

Microsoft Corp. said Friday its net income fell 18 percent in the last quarter, largely because it deferred revenue to let summertime PC buyers get free upgrades to Windows 7, which launched Thursday.

Investors looked past that accounting decision, noting that if it had counted its deferred Windows revenue, Microsoft's earnings would have increased 8 percent from last year. Microsoft shares jumped $2.64, 10 percent, to $29.23 in morning trading, hitting a 52-week high.

CNET coverage of Windows 7 Launch

The upgrade program, which let someone buy a PC with Windows Vista and later install Windows 7 on it for free, meant that Microsoft counted only half of its Windows sales in the period. It will report the rest as customers upgrade to the new system through January 2010, when the offer expires.

PC shipments edged up in the July-September period after falling all year, but the industry remains far weaker than even a year ago. Consumers and corporations have cut back on buying computers, servers and other technology during the recession, damaging Microsoft. The software maker resorted to its first wide-scale layoffs, announced in January, and saw annual sales fall from the prior year for the first time since the company went public in 1986.

In the last quarter, consumers helped boost PC shipments by buying more inexpensive laptops and small "netbooks." Those machines are less profitable for Microsoft, though, because they run lower-end versions of Windows.

Analysts now think businesses will start buying new computers and other technology again in the middle of 2010. Microsoft has been cautious about predicting the PC industry's turnaround, but others, especially Intel Corp., have indicated they expect things to improve faster, in the current quarter.

Microsoft said Friday its earnings dropped to $3.6 billion, or 40 cents per share. In the same period last year it earned $4.4 billion, 48 cents per share.

Revenue sank 14 percent to $12.9 billion. If not for the deferral on Windows, revenue would have totaled $14.4 billion, a 4 percent decline.

The group that makes Office software also saw its revenue and profit drop.

Microsoft said its cost-cutting has paid off: Its operating expenses were more than $600 million lower in the last quarter than a year ago. Microsoft also told analysts its expenses in the current fiscal year would be $300 million lower than previously expected.

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