Microsoft profit outlook misses view, shares fall

Sun, Jul 20 12:08 PM

By Daisuke Wakabayashi

LOS ANGELES (Reuters) - Microsoft Corp posted a quarterly profit and outlook below Wall Street expectations on Thursday, citing "tough" economic conditions, and its shares fell 6 percent.

The software maker, which is locked in an on-again, off-again pursuit of Yahoo Inc, said its current-quarter forecast factors in difficult economic conditions continuing for the remainder of 2008 before some improvement in the first half of 2009.

"It's what I would describe as a tough environment. It's clear other companies around us are suffering," Microsoft Chief Financial Officer Chris Liddell said in an interview with Reuters. "It hasn't hurt us significantly."

However, for the current quarter, Microsoft forecast earnings per share to range from 47 cents to 48 cents on revenue between $14.7 billion and $14.9 billion, below Wall Street forecasts on average of 50 cents per share in earnings on $15.06 billion in revenue, according to Reuters Estimates.

The world's largest software maker has weathered a soft U.S. economy by ramping up sales to emerging markets and offering a diverse set of products aimed at corporate customers and consumers.

Andy Miedler, analyst at Edward Jones, said Microsoft is not immune from the challenging economic conditions and that it was reasonable for the company to scale down its forecasts.

Particularly hard-hit by the weak U.S. economy, according to Liddell, is online advertising, a business in which Microsoft is already trailing rival Google Inc.

The search leader also reported quarterly earnings on Thursday, saying its online advertising business has held up well despite weak economic conditions. It reported a weaker-than-expected 35 percent rise in quarterly profit.

Microsoft sees an acquisition of part or all of Yahoo as a way to strengthen its position in the advertising business.

The company confirmed details of its latest proposal, revealed earlier this week by investor Carl Icahn, to buy the Web company's search business. The proposal included $19.5 billion to $26.5 billion in revenue guarantees over 10 years.

"We clearly continue to believe that our proposal is a compelling one," Liddell said on a conference call with analysts.

Microsoft, based in Redmond, Washington, also said it plans to invest an additional $500 million in its online strategy.

MISS IN THE QUARTER

For its fiscal fourth quarter ended June, Microsoft reported a net profit of $4.3 billion, or 46 cents per diluted share, up from a profit of $3.04 billion, or 31 cents per diluted share, in the year-ago period. Revenue rose 18 percent to $15.84 billion.

The earnings were a penny per share below the average analyst forecast of 47 cents per share, but the revenue beat their forecast of $15.65 billion in the June quarter, according to Reuters Estimates.

Microsoft's Liddell cited a 15 percent rise in hiring expenses during the quarter as one factor for coming in below Wall Street expectations.

The software maker was aided by strong demand for Windows 2008, the flagship software at its server and tools division. Customers signed up for long-term contracts for new software and revenue at the division rose 21 percent from a year ago.

Microsoft's main Windows division bounced back with a strong quarter, posting a 15 percent increase in revenue, helped by adoption of its new Vista operating system.

The unit's performance was a disappointment last quarter when revenue came in lower than expected from an inventory build-up of computers and a lack of progress in fighting piracy. The inventory build-up was resolved, according to Liddell, and 180 million Vista licenses have now been sold.

Microsoft forecast Windows division revenue to grow between 9 percent and 10 percent this fiscal year.

The quarterly profit growth looked even bigger due to a $1.06 billion charge that Microsoft incurred during last year's June quarter to fix problems with its Xbox 360 game console.

The online division posted an eighth straight quarter of decline with an operating loss of $488 million.

"The online services business is on everyone's mind," said Sid Parakh, analyst at McAdams, Wright, Ragen. "It's back and forth with Yahoo and Microsoft every day. That's distracting for investors and employees and even advertisers."

Since Microsoft went public with its unsolicited bid to buy Yahoo on Feb. 1, the stock is down 16 percent, as of the close of trade on Thursday, versus a 9 percent slide in the S&P 500. The stock fell to $25.85 in after-hours trade after closing at $27.52 on the Nasdaq.

"Clearly we are disappointed that our strong financial results are not reflected in our share price," Liddell said on the conference call. "At these prices, it's incredibly attractive for a buyback perspective."

Microsoft lowered its full-year estimates to an earnings range of $2.12 to $2.18 per share on revenue from $67.3 billion to $68.1 billion. Its previous estimates were for earnings per share in a range from $2.13 to $2.19 and revenue of $66.9 billion to $68 billion.

Analysts, on average, are forecasting the company to post earnings per share of $2.16 on revenue of $67.3 billion.

(Additional reporting by Ritsuko Ando and Robert MacMillan in New York and Tiffany Wu in San Francisco)

Inside News

Editor's picks