Microsoft Earnings Beat The Street

by Gavin O'Malley, Apr 25, 2008, 7:00 AM

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Thanks to sustained demand for its software and Xbox 360 game consoles, Microsoft beat Wall Street estimates with sound fiscal third-quarter results on Thursday.

Microsoft reported net income of $4.4 billion, or 47 cents per share, down 11% year-over-year. Sales revenue, meanwhile, met analysts' forecasts, rising to a modest $14.45 billion.

Analysts were expecting earnings of 44 cents per share--down from 50 cents year-over-year--on revenue of $14.4 billion, although Thursday's earnings were not a surprise to some.

"We have increased confidence in Microsoft's ability to beat third-quarter expectations," Pacific Crest analyst Brendan Barnicle said in research note earlier this week.

The results follow strong earnings from Google and IBM--a sign that technology and ad spending remain strong in the face of what is perceived to be a weakening U.S. economy.

Microsoft's fiscal 2009 guidance also beat Wall Street estimates. "It's clear that we're reaping the benefits of our diversified business," said Chris Liddell, chief financial officer of Microsoft, during an earnings call with analysts and the media Thursday.

For next year, the company said sales should be in the range of $66.9 billion to $68 billion, and that earnings would be between $2.13 and $2.19 a share. Wall Street had predicted sales of $66.5 billion and earnings per share of $2.10.

For the fourth quarter ending in June, Microsoft said it expects sales to be between $15.5 billion and $15.8 billion. The Street was expecting sales of $15.6 billion. Microsoft also said it anticipated earnings to be in a range of 45 cents to 48 cents a share, compared to estimates of 48 cents a share.

The report represented the third strong quarter for Microsoft, which had raised full-year revenue guidance by as much as $1 billion in its last quarterly report on the strength of its first half.

Regarding Microsoft's unsolicited $43 billion offer to buy Yahoo, Liddell said--in so many words--that it will not lift its stock-and-cash price. "We intend to remain disciplined in our approach," he said.

The other key issue for Microsoft, reiterated by Liddell, is time. "Speed is of the essence for the deal," he said. "Unfortunately, the deal has been anything but speedy."

Microsoft's deadline for Yahoo to negotiate a deal or face a proxy fight remains Saturday.

On Tuesday, Yahoo posted higher quarterly profits, but left its 2008 revenue forecast unchanged, which led to analysts predicting the worst for Yahoo.

"We think Yahoo has done enough to hold on a little longer but has fallen short of being able to convince shareholders to reject Microsoft's overtures," said Sanford C. Bernstein analyst Jeffrey Lindsay in a research note on Tuesday. "Unless Yahoo has a real alternative in the form of a deal with Google or AOL or both, then we think it is only a matter of weeks before Microsoft prevails."

In Morocco on Tuesday, Microsoft chief executive Steve Ballmer said Yahoo's results would not affect the company's offer.

Liddell briefly addressed concerns about the perceived economic downturn. "We're cautious," he said, "but have not seen any significant spillover to our businesses."

Entertainment and devices revenue for the quarter grew 68% over the comparable period last year, driven by robust demand for Xbox 360 consoles. Cumulative console sales surpassed 19 million during the quarter, up 74% from a year ago. Server and tools revenue growth was up 18%.

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