Microsoft results disappoint

By Daisuke Wakabayashi Thu Apr 24, 9:15 PM ET

SEATTLE (Reuters) - Microsoft Corp disappointed investors looking for stellar earnings on Thursday with soft Windows software sales and a below-target profit forecast, which overshadowed a strong outlook for next year.

Microsoft, whose shares fell 5 percent in after-hours trade, also pressed its attack on takeover target Yahoo Inc, saying time was of the essence and that the faded Web star needed to forgo "unrealistic expectations" that it is worth more than Microsoft's $44 billion offer.

Chief Financial Officer Chris Liddell acknowledged a weak U.S. economy, but said a slowdown in its domestic market had not hampered Microsoft's diverse set of businesses, which bring in more than 60 percent of its revenue from overseas.

"We're being cautious just like everybody else," Liddell said in an interview. He also said quarterly Windows revenue missed company expectations due partly to an inventory build-up of computers and a lack of progress in the company's ongoing battle against piracy.

Microsoft's profit fell 11 percent to $4.39 billion, or 47 cents per diluted share, in the March quarter on revenue of $14.45 billion. Analysts, on average, expected 45 cents a share on revenue of $14.49 billion, according to Reuters Estimates.

The third-quarter profit a year ago of 50 cents a share included a one-time 11 cent-per-share profit on a $1.6 billion revenue bump from sales deferred by delays in releasing upgrades to the company's Windows and Office software.

Expectations were running high for the latest Microsoft earnings, since it had posted two straight quarters of standout results. The stock had gained 13 percent in the last two weeks. But in after-hours trade, the stock fell to $30.20 from a Nasdaq close of $31.80.

"The real expectation was that they would beat both the revenue and profit number, but the top line was kind of weak," said Sid Parakh, analyst at McAdams Wright Ragen. "So from that standpoint, there is going to be a negative reaction."

The company projected earnings per share in fiscal 2009 starting in July to be in a range of $2.13 to $2.19 per share, and called for revenue of $66.9 billion to $68.0 billion.

Analysts, on average, had forecast $2.10 per share in fiscal 2009, right in the middle of their estimate range, on revenue of $66.5 billion, according to Reuters Estimates.

"It's nice that they're raising guidance for the rest of the year," said Kim Caughey, senior analyst at Fort Pitt Capital Group. "Microsoft is an extremely conservative company with respect to guidance."

For the current quarter, Microsoft forecast earnings per share of 45 cents to 48 cents per share on revenue of $15.5 billion to $15.8 billion, whereas Wall Street estimates, on average, had been 48 cents a share and $15.6 billion.

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Microsoft, which has set a Saturday deadline for Yahoo to reach a deal, said it would consider its alternatives including going hostile or withdrawing its offer if the two sides don't make progress toward an agreement by this weekend.

"Speed is of the essence for the deal to make sense," CFO Liddell said on a call with analysts. "Unfortunately, the transaction has been anything but speedy and has been characterized by what would appear to be unrealistic expectations of value."

In the last few days, Chief Executive Steve Ballmer has reiterated Microsoft has no plans to raise its cash-and-stock offer, which the Yahoo board has spurned, saying it significantly undervalues the company.

Revenue at Microsoft's Windows division, its most profitable business, fell 24 percent. That was below even the company's most pessimistic forecast for a 20 percent decline.

Microsoft cited slower PC growth in mature markets, while saying emerging markets saw an increase in the number of PCs sold without licensed software -- often a sign that pirated software will later be installed on the machines.

As a result, Windows sales lagged the overall 8 percent to 10 percent growth in the PC market, yet Liddell characterized its Windows problems as "quarter specific."

The magnitude of the decline was magnified by more than $1 billion in additional Windows revenue in the year-ago quarter for coupons issued to consumers affected by development delays. Office software sales also dipped because of $500 million in coupons last year.

"The division that did really well was the entertainment business," said Tom Telford, portfolio manager at American Century Investments, which owns Microsoft shares.

Microsoft's entertainment and devices division revenue jumped 68 percent due to strong Xbox 360 game console demand.

(Additional reporting by Gina Keating and Nichola Groom in Los Angeles, Ken Li in New York, Peter Henderson and Eric Auchard in San Francisco; Editing by Braden Reddall)