Something strange happened Thursday.  Every year, this time of year, for the past 23 years Microsoft had announced its quarterly results.  And every year saw a rise in earnings and revenue from the previous year.  However, this year, something happened to the company that had never before happened in its 23 years of public offering -- it saw a Q3 drop in sales and revenue (Microsoft's Q3 ends in March).

The drop even caught analysts by surprise, because though it was predicted, they were counting on a lesser one -- an average of $14.1B USD in revenue, down from $14.52B USD last year.  Instead Microsoft sales sunk 6 percent, down to $13.7B USD.

Worse yet, its net income plunged 32 percent to $2.98B USD.  With charges, the earnings per share were roughly in line with estimates. 

While some would perceive Microsoft's results as bleak, it’s important to remember that the company is still profitable.  While the drops are definitely a trouble sign, many companies would love to have a balance sheet like Microsoft's.  Chris Liddell, Microsoft's chief financial officer, states, "While I can't be happy in any quarter in which our revenue and earnings per share decrease, I'm pleased with our relative performance."

Microsoft has tough work ahead, though, as it faces a two-fold crunch.  The first problem is that the recession is denting computer sales, with sales down 7 to 9 percent worldwide for the quarter.  The second key problem is that netbooks are conquering the market, displacing traditional notebooks.  Where the average OS license from Microsoft runs $50 to $60 on average, the average netbook license is a mere $15.  Carl Howe, analyst with Yankee Group, states, "The trouble for Microsoft is that its cash cow is shifting.  PC sales are troubled, and they're getting hurt by the move to cheaper notebooks."

Microsoft’s Entertainment and Devices division, which includes the Xbox 360, posted a $31M USD loss and a 2 percent revenue drop.  Microsoft's only business unit to post an increase was its server unit, which saw a 7 percent rise in revenue, and a 24 percent rise in earnings.

Microsoft's one ace in its sleeve is Windows 7.  The new OS is getting glowing reviews from both tech journalists and testers in the public who downloaded it.  The new OS is scheduled for release in the first half of 2010.  However, given Microsoft's advanced development stage, and struggles, many analysts believe it may opt for an early holiday-season release to spur computer sales.