April 23 (Bloomberg) -- Microsoft Corp. rose as much as 5.9 percent in extended trading after reporting a smaller drop in third-quarter profit than some investors anticipated and predicting bigger cost savings this year.

Net income fell to $2.98 billion, or 33 cents a share, the company said today in a statement. Excluding some costs, earnings were 39 cents, matching the estimate of analysts in a Bloomberg survey. The shares had dropped 3.8 percent in the past two weeks on concern that profit would fall short.

Microsoft reaffirmed plans to eliminate as many as 5,000 jobs by the middle of 2010, with the goal of saving $1.5 billion annually in operating expenses. The company is cutting travel spending, putting off part of a campus expansion and paying less for contract workers. Microsoft said today it may reduce expenses more than predicted earlier, to as low as $26.7 billion in the year ending in June.

“It’s been a huge issue to people that these guys hadn’t been willing to cut enough costs,” said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon. Microsoft previously estimated expenses of $27.4 billion. “They are dramatically lowering what operating expenses will be.”

Sales Drop

The cost savings helped Microsoft overcome the first revenue decline since the company went public in 1986. Sales fell 5.6 percent to $13.6 billion in the third quarter, which ended March 31. That missed the $14.1 billion estimated by analysts.

Microsoft, the world’s biggest software maker, rose as much as $1.11 to $20.03 in extended trading after the report was released. The shares, down 2.7 percent this year, closed at $18.92 on the Nasdaq Stock Market.

“While I can’t say I’m happy with any quarter where our revenue and earnings per share decrease, I was actually pleased with our relative performance,” Chief Financial Officer Chris Liddell said on a conference call.

The Redmond, Washington-based company didn’t provide a forecast for the fourth quarter. It also abandoned its usual practice of providing a prediction for the new fiscal year, which starts in July. Microsoft has given that forecast every April since 2000.

Expenses last quarter were $150 million less than Barnicle had estimated. The company cut sales and marketing by 8.9 percent and overhead costs by 61 percent.

“Investors will be encouraged by the company controlling costs,” said Sid Parakh, an analyst at McAdams Wright Ragen in Seattle. “They see it as the best they can do in this environment.”

Severance Costs

Net income included 6 cents a share of costs related to severance and investment writedowns. Profit fell 32 percent from $4.39 billion, or 47 cents a share, in the year-earlier period.

Microsoft continues to grapple with a slump in corporate demand and consumers’ preference for cheap laptop computers called netbooks, which use a less expensive version of Windows.

Sales from personal-computer versions of Windows fell 16 percent to $3.4 billion, less than the $3.5 billion estimate of Heather Bellini, an analyst at UBS AG in New York. The Internet unit’s revenue fell 14 percent to $721 million, missing Bellini’s estimate of $810 million.

Microsoft’s three other divisions also fell short of Bellini’s predictions. Four out of the five units posted declines from the year-ago quarter.

“I didn’t see any improvement at the end of the quarter that tells me we are at the bottom,” Microsoft’s Liddell said.

PC Industry

Total PC shipments fell 7.1 percent last quarter, according to market research firm IDC. That ate into sales of Microsoft’s Windows operating system and Office software. While netbooks are fueling some growth, those machines use the older and cheaper Windows XP operating system.

Microsoft’s Windows business should “track PC sales overall,” said David Rudow, a senior equity research analyst with Thrivent Asset Management in Minneapolis. His firm owns 4.7 million Microsoft shares. The fact that Microsoft’s sales fell faster than the rest of the industry suggests that the company is selling lower-cost versions of Windows, he said.

To win over corporate customers, Microsoft is offering promotional prices on many of its server-computer programs and multiyear agreements, said Paul DeGroot, an analyst at Directions on Microsoft in Kirkland, Washington. The reductions represent Microsoft’s biggest price cuts in a long time, he said.

If customers buy a certain license for Windows Vista Business Edition lasting multiple years, they get a 15 percent discount. Microsoft is offering server software such as the Exchange e-mail program at 20 percent to 35 percent off under some license plans, DeGroot said.

Liddell said there had been no “unnatural discounting” and that multiyear contracts remain strong.

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net

Last Updated: April 23, 2009 18:51 EDT