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Thursday, July 23, 2009, 04:10 pm PT (07:10 pm ET)

Microsoft suffers worst fiscal year ever while Apple rises

Once accustomed to ever-rising profits, Microsoft has been dealt two blows with both its second quarter of losses in a row and its first-ever annual decline, all at the same time as Apple has had its best non-holiday quarter yet.

The Redmond, Washington company told investors on Thursday that its spring quarter sales shrank 17 percent compared to a year ago, down to $13.1 billion, and pinned most of the shortfall on a perilous drop in sales for its Client division, which produces the Windows operating system and forms the backbone of its business. Revenue for that group fell an unprecedented 28.7 percent to just over $3.1 billion and was hit directly by slower sales of regular and server PCs; Microsoft estimates these have fallen 5 to 7 percent compared to where they were a year ago.

Other divisions also took a hit, including a 25 percent blow to the Entertainment and Devices group that handles both the Xbox and Zune as well as in Microsoft's server software, online and business segments.

Unsurprisingly, Microsoft chief operating officer Kevin Turner associated the decline with "challenges" in the current economic climate. However, the result caps off a particularly disastrous year for the company. Just last quarter, the software's developer revenue had declined 6 percent after years of steady gains and management felt forced to cut 5,000 jobs. Either of these were previously extremely rare occurrences, but the second negative quarter was enough to tip Microsoft into the red for its complete fiscal year ended in June — a fate unheard of in the 23 years since the company first went public and began reporting its results.

Although eager to show that its performance might turn around soon, pointing out $750 million in cost-cutting and the fall releases of Windows 7 and Windows Server 2008 R2, Microsoft's results stand in stark contrast to Apple's. The Mac maker on Tuesday reported its best non-holiday quarter in history after posting record revenue and said its profits alone had grown 15 percent as two of the three pillars of its business performed above expectations. Moreover, Microsoft's willingness to provide an overview of the PC industry has inadvertently confirmed Apple bucking a wider downward trend. Mac sales increased 4 percent this quarter versus spring 2008 and may have Apple gaining almost as much percentage-wise as the predominantly Windows-led market will have lost.

Having to recognize a second straight quarter of declining fortunes additionally underscores an increasing sense of urgency at Microsoft, whose reputation has been hurt by real and imagined flaws in Windows Vista. In the past several months, it has resorted to price-oriented ads that attack supposedly inflated Mac prices but de-emphasizing Windows itself. The ads themselves were at least somewhat neutered by a round of price cuts and system upgrades to MacBook Pros that rendered many of the arguments invalid or muted.

And while COO Turner has tried to claim that the ads were effective by noting Apple's request they be pulled, substantially reduced Windows sales and the ensuing fall in Microsoft's bottom line have together revealed the TV spots doing little, if anything, to prevent customers from buying Macs in greater numbers.