Microsoft results disappoint, earnings flat

Microsoft late yesterday reported a drop in quarterly income compared to the same quarter last year, causing its share price to tumble five per cent in after hours trading.

The software maker's third-quarter (Q3) earnings for its 2007 financial year matched financial analyst expectations and increased slightly compared with the same quarter ending 31 March last year, with $14.5 billion (£7.3 billion) in revenue.

Diluted earnings per share were $0.03 higher than consensus expectations as polled by Thomson Financial of $0.44 (22p), but down from the $0.50 (25p) earnings per share reported for its Q3 last year.

Operating income came in at $4.4 billion (£2.2 billion), down from $6.59 billion (£3.3 billion) for the same period last year. But the results were affected by a $1.42 billion (£710 million) and $0.15 (7.5p) per share charge as a result of the $350-million fine levied by the European Commission for failing to comply with its antitrust ruling towards the end of last year.

But in its earnings calls with analyst, the company was keen to highlight entertainment and devices business revenue growth of 68 per cent year-on-year, due mainly to strong sales of its Xbox 360 game consoles, which passed 19 million for the quarter, which was up 74 per cent on last year's Q1.

Revenue also grew 18 per cent year-on-year in its server and tools business, off the back of major Windows Server 2008, SQL Server 2008 and Visual Studio 2008 product launches.

Chris Liddell, Microsoft chief financial officer said the weak dollar had affected its business, given the fact that it does two-thirds of its business was outside the US. But at the same time, he said the company's broad portfolio and geographic reach had mitigated the affects of the domestic economic downturn.

But despite the fact Microsoft talked up the fact that it had to date sold 140 million copies of Vista, sales of its latest operating system (OS) dented year-on-year revenue in its client software business.

"The only Vista impact really is the launch last year and a strong comparable, but that's not really a comment on this quarter," said Liddell. But, in response to continued reports that both consumer and enterprise users are reluctant to adopt the new OS, he added: "If we sell a unit of XP rather than Vista, we're still relatively happy."

He also addressed the ongoing, $44.6 billion takeover bid for Yahoo: "Speed is of the essence for the deal to make sense," he said. "Unfortunately, the transaction has been anything but speedy and has been characterised by what would appear to be unrealistic expectations of value."

Despite posting flat results, Microsoft revised its expectations up for its full fiscal year, ending 30 June. It said revenue was expected to be the range of $66.9 to $68 billion (£33.9 to 34.4 billion) instead of $59.9 to $60.5 billion (£30.3 to £30.6 billion) it had previously predicted.

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