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Microsoft Dinged Despite Hefty Revenues

Microsoft earnings
As expected, Microsoft turned in another record quarter -- as well as another record year -- when it reported fiscal 2008 revenues and earnings Thursday. But the performance wasn't enough to cheer investors.

For the fiscal year ended June 30, Microsoft brought in revenues of $60.42 billion and posted income of $22.49 billion, or $1.87 per share. That represents growth of 18 percent in revenues from fiscal 2007, 21 percent growth in earnings, and 32 percent growth in per-share earnings.

However, the year's per-share earnings came in at the bottom of earlier guidance: CFO Chris Liddell had earlier placed full-year earnings between $1.87 to $1.90 per share.

The disappointment didn't end there, however.

The company said fourth-quarter income came in at $5.68 billion, a 42 percent gain, with earnings of $0.46 per share -- 48 percent growth year over year. Still, Wall Street had been expecting earnings of a penny more per share, according to Reuters Estimates.

Additionally, Microsoft executives forecasted next fiscal year's earnings in the range of $26.3 billion to $26.9 billion, and $2.12 to $2.18 per share.

That may be part of what gave investors heartburn. Last quarter, the company had provided far rosier guidance -- with income in the range of $26.7 billion to $27.4 billion, and earnings of $2.13 to $2.19 per share.

The triple-whammy sent the company's stock slipping, down $1.55 or 5.63 percent in early after-hours trading.

"Clearly, we're disappointed that our strong financial results are not reflected in our stock price," Liddell told financial analysts during the company's earnings conference call. "The 18 percent revenue growth rate represents our fastest growth in over a decade [and] we're confident we can continue to produce double-digit growth."

Signs of strength

Although sales and earnings have slowed a bit since the company's heydays of barn-busting records, fiscal 2008 was nothing to sneeze at.

Microsoft last year finally broke the $50 billion in revenues mark, but sales continued growing at a rapid clip this year, with the company passing $60 billion -- a growth rate rare for a company as large and as well-established as the Redmond giant.

Additionally, revenues for the fourth fiscal quarter alone totaled $15.4 billion, an 18 percent jump from the same quarter last year.

Despite the earnings disappointment, company officials remained bullish about the near term. For the current quarter, Microsoft's guidance is in the range of $14.7 billion to $14.9 billion in revenues. Executives also forecasted $5.9 billion to $6.0 billion in income, and earnings of between $0.47 and $0.48 per-share.

Company officials today also gave fiscal 2009 revenue guidance in the range of $67.3 billion to $68.1 billion, largely in line with previous guidance of $66.9 billion to $68 billion.

Looking back to fiscal 2008, Liddell attributed its robust sales to Windows Server 2008 and Visual Studio 2008, which both shipped in the last half of the fiscal year. A third money-making product, however, SQL Server 2008 will not ship until the current quarter at the earliest, however.

Other contributors to Microsoft's fiscal 2008 results included sales of Office 2007 and its related servers -- such as SharePoint -- as well as Xbox 360 consoles and games.

In the meantime, sales of Vista have topped 180 million units, according to a Microsoft statement.

[cob:Pull_Quote]The report comes on the heels of a fiscal year that, in its second half began demonstrating some chinks in the software colossus's armor.

For the first fiscal quarter, Microsoft turned in its single best quarter since 1999 -- raking in $13.76 billion in revenues, a 27 percent increase from the same quarter a year earlier.

It followed that up with a stellar second quarter -- anchored by the all-important holiday sales season -- that brought in $16.37 billion in revenue.

The third fiscal quarter, which ended on March 30, proved less impressive. Not only were sales of Windows clients -- which includes both Vista and XP -- flat, but Microsoft also took a hit from paying $1.42 billion in fines from the European Commission. (The company is appealing a second fine of $1.35 billion.)

For the quarter, Microsoft reported $14.45 billion in revenues, nearly identical to the third quarter of fiscal 2007.

More good news

Despite the shareholder thrashing, one industry observer sees positive signs elsewhere in the company's financials.

Microsoft is seeing growth in what's called "unearned revenue" -- money that Microsoft has set aside for portions of contracts with large customers that haven't been fulfilled yet, such as long-term agreements to supply software over a given number of years.

Last year, Microsoft booked $12.6 billion in unearned revenue, while this year, it reported $15.3 billion.

"A huge increase in unearned revenue shows that Microsoft's core strength remains selling software to large businesses -- companies are signing multiyear license agreements, and adding more software to those agreements," Matt Rosoff, lead financial analyst at Directions on Microsoft, told InternetNews.com in an e-mail.

"Since 40 percent of Microsoft's overall revenue comes from these agreements, this is great news for the company," he added.

Meanwhile, Microsoft execs are preparing for next Thursday's annual Financial Analysts Meeting, where the company traditionally lays out its business, technology and product plans to the investor community.

Update adds commentary from Liddell and Rosoff.