Microsoft gives rosy outlook

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NEW YORK (CNNMoney.com) -- Software giant Microsoft Corp. announced its fiscal third-quarter earnings Thursday, posting a quarterly profit that beat expectations thanks to strong sales of server software and Xbox 360 game consoles.

Microsoft also offered fiscal 2009 guidance that topped Wall Street's estimates.

Microsoft's net income fell to $4.4 billion, or 47 cents per share, down 11% from year ago results. Analysts polled by Thomson Financial were looking for 44 cents per share.

Sales rose negligibly to $14.5 billion, roughly meeting analysts' forecasts.

But Microsoft faced tough comparisons with a year ago -- when the company recognized revenue and profits it deferred due to the delayed release of its Vista operating system. That provided a big sales and earnings boost to last year's results.

The company gave mixed guidance for its fourth quarter, however, saying that it expects sales to be between $15.5 billion and $15.8 billion for the quarter ending in June. Wall 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 consensus estimates of 48 cents a share.

Microsoft's fiscal 2009 forecast was better than what analysts were expecting though. The company said sales should be in a range of $66.9 billion to $68 billion and that earnings would be between $2.13 and $2.19 a share. Wall Street was forecasting sales of $66.5 billion and earnings per share of $2.10.

"[This] is an outstanding achievement given the current economic situation," said Microsoft chief financial officer Chris Liddell in a conference call with analysts.

Despite this, shares of Microsoft (MSFT, Fortune 500) fell more than 4% in after-hours trading. The stock had gained more than 12% since the beginning of the month though in anticipation of a strong earnings report.

Microsoft's results come two days after Yahoo (YHOO, Fortune 500) reported earnings that beat analysts' forecasts. Microsoft offered to buy the company on Feb. 1 and has given Yahoo until Saturday to respond, and some analysts believe that Microsoft may have to raise its offer. The deal was originally worth $44.6 billion in cash and stock, but the value has fallen a bit as Microsoft's stock has dropped slightly since February.

Microsoft has expressed interest in Yahoo at a time when its online services unit -- which owns MSN and sells online advertising -- continues to struggle. Though the company acquired online ad firm aQuantive last year, Microsoft still reported an operating loss of $228 million in its online division during the quarter.

"They won't be able to support profitability for another three years [in online services]," said Pat Becker, chief investment officer with Becker Capital Management, an investment firm which owns shares of Microsoft."That's their explanation as to why they're going after Yahoo."

But Yahoo rejected Microsoft's initial offer, prompting rumors of deals between Yahoo and AOL - the Internet wing of CNNMoney.com's parent company, Time Warner (TWX, Fortune 500), as well as a joint-takeover bid of Yahoo by Microsoft and News Corp (NWS, Fortune 500).

Also, in a move that some analysts see as an attempt to disrupt Microsoft's takeover bid, Google (GOOG, Fortune 500) recently struck a trial deal with Yahoo that will place its AdSense search results on Yahoo's Web site.

But despite the resistance to its takeover, Microsoft chief executive Steve Ballmer has said that he will not change the company's bid. Liddell echoed Ballmer on the call with analysts.

"Yahoo would help our [online advertising] efforts, but the biggest argument I've heard for increasing our bid -- simply because we can afford to -- is not one that I favor," said Liddell. He also reiterated what was said in Microsoft's April 5 letter to Yahoo's board of directors, saying Yahoo's delay is based in the struggling Internet company's "unrealistic" overvaluation of itself.

But "with or without Yahoo," Liddell said, "Microsoft is committed to online advertising."

Becker agrees that Microsoft should not budge on its offer.

"Microsoft's position has been that they gave a fair offer to Yahoo, and they didn't want to waste time strategizing by starting low and working up [to an agreeable offer]," he said.

Beyond the battle for Yahoo, Microsoft has had to deal with a tepid welcome from customers for Vista. Though the company has declared the new operating system is superior to its XP predecessor, IT managers have been slow to adopt Vista. Consumers have also reacted sourly to Microsoft's plans to stop selling XP soon.

Sales in Microsoft's operating system unit fell nearly 24% from a year ago.

"Most of Vista's sales have come when consumers buy new computers off of Dell's Web site," said Becker. "The big thing for Microsoft is the corporate buys, but that isn't expected to pick up until the back half of 2009."

Microsoft also faced adversity abroad in the past quarter. European Union regulators fined the company a record $1.3 billion in February for three years of overcharging competitors for information on how to make products that work with Windows. The company took a charge during the quarter to account for the fine.

But other areas helped pick up the slack. Revenue from its entertainment and devices division, which includes the Xbox 360, rose 68% over the same period last year. The company also performed well in its server unit, with revenue growing 18% in that sector.

The company also got a bump from rising personal computer sales, which grew one percentage point more than expected overseas, according to Microsoft General Manager of Investor Relations Colleen Healy. That may have helped Microsoft beat the Street, as analysts had based their estimates on lower PC sales, according to Becker.