Microsoft profit drops despite gains from SQL Server 2005, Xbox 360

Microsoft revenue was up for its fiscal 2006 fourth quarter, but profit was down due to expenses and legal charges.

Strong sales of the Xbox 360 and SQL Server 2005 helped Microsoft Corp. end its fiscal year on a bit of a high note Thursday, though income was down due to expenses and legal charges.

For its fiscal fourth quarter, which ended June 30, Microsoft reported revenue of US$11.8 billion, which beat Wall Street expectations of US$11.6 billion and was a 16 percent increase over the year-ago figure.

However, Microsoft's net income for the quarter, which ended June 30, was down 24 percent over the previous year. The company reported net income of US$2.83 billion and earnings per share (EPS) of US$0.28, which included legal charges. Excluding those charges, Microsoft earned US$0.31 per share for the quarter, slightly higher than estimates by analysts polled by Thomson Financial, which expected Microsoft to earn US$0.30 per share for the quarter. For the same quarter last year, net income was US$3.7 billion, or US$0.34 per share.

Microsoft Thursday also reported results for its 2006 fiscal year. The company reported revenue of US$44.28 billion for the year, an 11 percent increase over the prior year. Net income was US$12.6 billion, or US$1.27 per share, a penny over estimates by Thomson Financial analysts, which expected the company to earn US$1.26 per share for the year.

In addition to reporting financial results, Microsoft also authorized a significant stock repurchase plan. The company said it will repurchase US$20 billion in stock by Aug. 17, and an additional US$20 billion in an ongoing share repurchase program that expires on June 20, 2011. The company also said it completed a previously announced US$30 billion stock repurchase program.

Looking ahead to 2007, Microsoft raised its guidance for both revenue and EPS. Previously, the company said it expected revenue in the range of US$49.5 billion to US$50.5 billion for 2007, but said Thursday it expects revenue to be between US$49.7 billion to US$50.7 billion. Microsoft anticipates EPS for 2007 will be in the range of US$1.43 to US$1.47, higher than the range of US$1.36 to US$1.41 it had previously expected.

Microsoft has already said it will sink a hefty investment back into the company in 2007, increasing spending to the tune of nearly US$3 billion during the year. On a conference call Thursday afternoon, Microsoft Chief Financial Officer Chris Liddell broke down how the company would allocate those investments, going into more detail than the company normally does about such matters, he said.

Microsoft plans to spend US$450 million on marketing and launch costs related to its two major product launches in 2007, the Windows Vista OS and Office 2007. Another US$450 million will go to sales force and general marketing growth, with US$1 billion being set aside for the development of high-growth products and services, such as business intelligence, unified communications and IPTV (Internet Protocol TV), Liddell said.

Microsoft plans to spend US$500 million to expand its online business, including its adCenter advertising platform, as well as its Live services, such as Office Live, CRM Live, Windows Live Search and other Web-based offerings. Additionally, the company will spend another US$300 million in general cost increases and other unspecified spending, Liddell said.

One thing Liddell would not address was speculation that Windows Vista would miss its target release dates of November for business customers and January 2007 for consumers, saying only that Microsoft is still on schedule for Vista's release. However, Liddell said that it will not be until "we have the date locked in" that Microsoft can predict when launch expenses for Vista will affect the company's financial results, a comment that seemed to leave room for the release of the OS to slip further.

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Elizabeth Montalbano

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