Update: Microsoft revenue falls short of expectations

IDG News Service - Citing a mixed enterprise software environment, Microsoft Corp. today reported year-over-year increases in revenue and net income for its third fiscal quarter. But revenue fell short of Wall Street expectations.

The Redmond, Washington-based software maker earned $2.56 billion, or 23 cents per share, in the quarter ended March 31, the company said in a statement. That compares to earnings of $1.32 billion and 12 cents per share in the year-ago period, Microsoft said.

Legal costs pushed down earnings in this year's third quarter by 5 cents per share, and in last year's third quarter by 17 cents per share, the company said. Charges for stock-based compensation of Microsoft employees also ate into earnings per share in both quarters.

Excluding the legal charges and 4 cents per share for stock-based compensation, earnings per share were 32 cents, a Microsoft spokeswoman said. That is in line with analyst expectations, according to a consensus estimate on that basis from Thomson First Call.

Last year's third quarter included $2.53 billion in charges related to a settlement with Sun Microsystems Inc. and a fine imposed by the European Commission, Microsoft said. This year, the legal charges amounted to $768 million, which included settlements with Gateway Inc. and Burst.com Inc. and a payment to Sun.

Revenue grew by 5% year-on-year to $9.62 billion, from $9.18 billion. Microsoft's Server and Tools business was especially successful in the quarter, with 12% revenue growth year-on-year on double-digit sales increases of the SQL Server database and Exchange e-mail server product, Microsoft said.

Still, revenue fell short of analyst expectations of $9.83 billion, according to a consensus estimate from Thomson First Call.

Microsoft also missed its own revenue forecast. In January, the company said it expected third quarter revenue to be at least $9.7 billion.

"The quarter played out largely as expected. Our slight revenue miss was driven primarily by the combination of unfavorable exchange rate movements since we gave you guidance in January and a greater than expected decline in commercial and retail licensing for the client business," said Curt Anderson, general manager of investor relations at Microsoft. Overall Windows client revenue was up 2%.

Sales of the Windows client operating system and Office, Microsoft's two biggest products, showed little growth and revenue at the MSN Internet business decreased slightly.

Revenue at the Information Worker group, which includes Office, also increased 2%, primarily as a result of currency exchange rate benefits. Retail sales of Office were strong, but corporate users not renewing upgrade contracts held down the group's results, Microsoftsaid.

MSN revenue declined 5% as more customers switched away from Microsoft's MSN Internet Access dial-up service. Advertising and subscriptions for other MSN services increased, Microsoft said.

Microsoft is optimistic about its next fiscal year, which starts in July and ends June 30, 2006. The company expects to earn between $1.26 and $1.30 per share on revenue between $43.3 billion and $44.1 billion.