by CIO Staff

Microsoft Misses Analysts’ Target for Q3

Apr 28, 20064 mins

New products helped Microsoft grow revenue 13 percent year over year for its fiscal 2006 third quarter, but earnings per share slightly missed analyst estimates.

Revenue for the Redmond, Wash., software maker’s quarter that ended March 31 was US$10.9 billion, a 13 percent increase over the same period last year, when Microsoft brought in $9.6 billion.

Net income for the period was $2.98 billion, or $0.29 per share, which included $0.03 in legal charges. Excluding those charges, Microsoft earned $0.32 per share, a penny less than the $0.33 per share analysts surveyed by Thomson First Call had expected the company to earn for the quarter.

For the same quarter last year, net income was $2.56 billion or $0.23 cents per share, which included $0.05 per share in legal charges.

Microsoft attributed its quarterly revenue growth to strong sales of new products such as SQL Server 2005, Microsoft Dynamics enterprise applications and its Xbox game console, as well as continued strength in its server and tools business.

Revenue for Microsoft’s home and entertainment group was up more than 80 percent due to Xbox demand, the company said. However, some financial analysts had expected growth to be slightly stronger.

SQL Server revenue grew more than 30 percent for the quarter, while Microsoft Business Solutions, the unit where Microsoft’s Dynamics applications reside, saw 21 percent revenue growth, the company said. SQL Server is a part of Microsoft’s Server and Tools division, which had its 15th consecutive quarter of double-digit revenue growth, according to Microsoft.

Revenue guidance for the fourth quarter, which ends June 30, is expected to be in the range of $11.5 billion to $11.7 billion, with diluted earnings per share expected to be $0.30. Analysts said Microsoft’s guidance for earnings per share for the next quarter is a little on the low side.

On a conference call Thursday, Microsoft also provided guidance for 2006 as a whole. The company expects revenue of between $44 billion and $44.2 billion, an increase of 11 percent over the past fiscal year. Operating income will be between $16.6 billion and $16.8 billion, the company said.

Microsoft Chief Financial Officer Chris Liddell said the company expects to sacrifice growth in operating income in fiscal 2007 as it continues to pour investments back into the company, in particular its online services business. Microsoft plans to significantly increase spending in 2007 to better address the online services and advertising market, he said. The company also plans to make acquisitions to beef up its offerings in this area, Liddell said.

Last November, Microsoft launched its Live services strategy, and the company continues to add Web-based services to compete with both Yahoo and Google. It also continues to work on adCenter, a new system for selling advertising within its search results.

However, Liddell insisted the company is not focusing its services and advertising platform on any single competitor. Rather, the company is focusing on services “across a broad range of scenarios” that are “competitive but have enormous potential for growth.”

Other areas of investment Microsoft plans to focus on are marketing and advertising campaigns around the upcoming product launches of Office 2007 and Windows Vista, which are both expected to be available to business customers at the end of the year and consumers in January 2007. In addition, the company is working to aggressively build out its software strategies for collaboration and business intelligence, as well as both mobile and online search offerings.

On Thursday’s call, Microsoft slightly revised its expectations for how many Xbox 360 consoles it expects to ship by the end of its fiscal year in June. The company previously said it expected to ship between 4.5 million and 5.5 million consoles. Liddell said Microsoft expects that to be in the higher range of its expectations, with the company shipping between 5 million and 5.5 million consoles by June 30.

Wall Street reacted negatively to Microsoft’s earnings announcement. During the hour after the earnings were released, the company’s stock fell 4.66 percent from $27.25 to $25.98 in after-hours trading. More than two hours later in the day, the stock was down 6.2 percent to $25.56.

— Elizabeth Montalbano, IDG News Service

This article is posted on our Microsoft Informer page. For more news on the Redmond, Wash.-based powerhouse, keep checking in.

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