Microsoft treasury nearly doubles

Reed Stevenson

SEATTLE: Microsoft Corp. gave a positive outlook for the upcoming business year despite failing to meet its own and Wall Street revenue targets, and its shares edged higher.

Quarterly profit nearly doubled as legal costs fell dramatically, and sales of server software for networked computers and the Xbox video game console stood out in the latest quarter.

Future sales would be supported by a "strong product pipeline," said Microsoft corporate controller Scott Di Valerio.

Microsoft is set to unveil the next generation of its Xbox console on May 12 on MTV, and the company detailed new features this week of a major upgrade to Windows, code-named Longhorn, that is due out in 2006.

"The outlook for fiscal 2006 is better than we expected," said Brendan Barnicle, an analyst at Pacific Crest Securities. The forecast offset the impact of slightly disappointing revenue in the quarter, he said.

The world's largest software maker reported net profit nearly doubled to $2.56 billion, or 23 cents a share, for its fiscal third quarter ended March 31, from $1.32 billion, or 12 cents a share, a year earlier.

The latest quarter included a $768 million legal charge for an antitrust settlement with computer maker Gateway Inc. and as a reserve for ongoing antitrust claims. A year earlier, Microsoft took a $2.53 billion charge for a settlement with Sun Microsystems Inc. and a European Commission fine.

Revenue rose to $9.62 billion from $9.18 billion but was short of the average outlook for $9.8 billion, according to analysts' forecasts.

For the latest quarter, excluding the legal charge and stock-based compensation, Microsoft said it earned 32 cents a share, in line with Wall Street targets.

"It looks to be a good quarter and constructive on the outlook," said Jordan Posner, senior portfolio manager at Matrix Asset Advisors.

Microsoft shares rose to $24.60 in after-hours trade on the Inet electronic brokerage from their Nasdaq close of $24.45.

For the current fiscal fourth quarter to June, Microsoft projected revenue of $10.1 billion to $10.2 billion,

compared with the Wall Street target of $10.1 billion, and earnings per share of 27 cents to 28 cents, compared with analysts' target of 27 cents.

In addition, Microsoft projected fiscal 2006 revenue of $43.3 billion to $44.1 billion and diluted earnings per share in the range of $1.26 to $1.30. Wall Street on average had targeted $43.3 billion in revenue and net earnings of $1.27 per share for fiscal 2006.

Growth in sales of personal computers, a key driver for sales of Microsoft's Windows revenue, would be around 11 percent for the fiscal year, Di Valerio said.

"Overall I think we're looking at pretty reasonable spending on the IT (information technology) side," Di Valerio told Reuters.

Revenue in every Microsoft division, except its MSN Internet business, grew in the latest quarter.

Microsoft's Windows division, which includes its flagship operating system software, posted revenue growth of 2.1 percent to $2.98 billion, while the Server and Tools division grew 11.6 percent to $2.45 billion.

Sales in the division that includes Microsoft Office rose 2.5 percent to $2.77 billion.

In the Home and Entertainment division, which includes the Xbox business, revenue climbed 11.9 percent to $593 million.

MSN sales fell 4.6 percent to $564 million.

Microsoft also announced on Thursday it had settled a class action in Nebraska, where it was sued for overcharging customers for software, and would pay $22.6 million to consumers and businesses in vouchers for computer-related products.

(Additional reporting by Peter Henderson, Anna Driver and Lisa Baertlein)