RealTime IT News

Microsoft Earnings Reflect Transitions

Microsoft's fiscal third-quarter sales and earnings fell just short of Wall Street estimates, due to a combination of legal expenses and slightly lower sales. The fourth quarter looks to be more of the same.

Microsoft's earnings of 32 cents per share were a penny shy of estimates. Quarterly sales rose 13 percent over the same quarter last year to $10.9 billion, but analysts were looking for revenues of $11.04 billion.

Microsoft confirmed Wall Street's view of the company's prospects in a statement accompanying the earnings release: "We are now accelerating our investments in the business to drive future growth, which is reflected in our financial guidance. We believe next fiscal year will deliver even stronger double-digit revenue growth than this year."

Operating expenses for the quarter were higher than the same quarter in '05, due in part to the expense of the XBox 360 console and staffing up in preparation for new product launches, said CFO Chris Liddell on a conference call. Not helping things was Microsoft's numerous legal battles, which took 3 cents off the bottom line. Foreign exchange rates took one percent off revenue, he added.

There were bright spots in the report. Home entertainment grew by 85 percent as XBox 360 sales doubled, bringing the installed base to 1.7 million consoles. The company raised the lower end of its projected installed base for the year, from the 4.5 to 5.5 million range to 5.0 to 5.5 million. On the flip side, Liddell said that sales of the original XBox were falling off faster than expected, and the resulting loss of revenue would have an impact on revenues.

Servers and tools grew 16 percent year-over-year, the 15th consecutive quarter of double-digit growth, as SQL Server 2005 performed very well. SQL Server sales were up 30 percent over the previous quarter.

MSN revenue dipped slightly, down three percent over the previous year, as Internet access revenue declined 31 percent, something Microsoft expected, as customers are moving away from dial-up Internet in favor of broadband at a rapid pace. The company is transitioning MSN to a new ad server, called adCenter.

The Redmond, WA-based software giant's Q4 quarter guidance was also a little mixed. The company said it expects earnings of 30 cents a share on sales of $11.5 to $11.7 billion, compared to forecasts of $11.64 billion in sales and 34 cents in earnings. OEM sales should grow in line with the market and Microsoft expects around seven to eight percent client growth. Servers and tools, however, are expected to grow 17 to 18 percent over the prior year.

Microsoft also offered a first look at fiscal year 2007, which starts July 1. The company is projecting revenue of between $49.5 and $50.5 billion, an 11 percent growth over FY06, with operating income in the range of $18.7 to $19.3 billion and EPS of between $1.36 and $1.41. This is a preliminary view of fiscal '07, Liddell said, and is subject to change. More information would be available in July during a financial analyst meeting.

With analysts expecting a slowdown in PC sales ahead of next year's broad release of Windows Vista and Office 2007, the lackluster results weren't too much of a surprise. Microsoft shares traded down about 5% in after-hours trading.