Microsoft hit after earnings and forecast miss

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NEW YORK (CNNMoney.com) -- Shares of Microsoft Corp. dropped more than 6% in after-hours trading after the software giant posted a fiscal fourth-quarter profit that fell short of Wall Street's estimates as it forecast lower-than-expected revenue for the following quarter.

Net income rose 42% from year ago results to $4.3 billion, or 46 cents per share. Analysts polled by Thomson Reuters were looking for a profit of 47 cents per share.

Sales rose 18% to $15.84 billion, beating analysts' forecasts of $15.65 billion.

Looking ahead, Microsoft said fiscal-first quarter revenue would come in between $14.7 billion and $14.9 billion. Analysts were hoping for $15.06 billion.

The company's XP operating system was upgraded in early 2007. But users have been slow to adopt the new Vista system.

"The Vista upgrade cycle is not providing the same growth that previous upgrade cycles have helped them," said Richard Williams, senior software analyst at Cross Research.

Chris Liddell, chief financial officer of Microsoft, admitted tough economic headwinds in the months ahead. "Looking forward, despite difficult economic conditions, we will build upon the momentum exiting fiscal year 2008," he said in a written statement.

But fears of a slowing economy are expected to pinch technology spending. "Economic weakness is hurting them," said Williams.

Another analyst says that overall, Microsoft has actually been holding up well. "These results were really pretty solid," said Peter Misek, global technology strategist for Canaccord Adams. "They have not seen this broad malaise that has hit Wall Street."

"Xbox was a huge hit. Servers were a huge hit," said Misek. "It was really focused on the Internet side and cost escalation."

Misek was disappointed by high operating expenses. The company reported total operating expenses for the fourth quarter of $10.15 billion.

Misek says that Microsoft is not going to beat Google in Internet search in the near term. With Microsoft spending so much this quarter to try to compete, "the only people that lose are the shareholders," he said.

For the full year ended June 30, Microsoft announced revenue of $60.42 billion, an 18% increase over the prior year. Earnings per share for the year totaled $1.87.

Microsoft (MSFT, Fortune 500), like chipmaker Intel (INTC, Fortune 500), which reported better-than-expected earnings earlier this week, is widely viewed as a key barometer of technology spending.

Chief operating officer Kevin Turner said the coming year would offer expanding Internet services. "The outlook for fiscal year 2009 is positive given the breadth of our impressive technology portfolio and the expanding collection of online services we are bringing to market," he said in a written statement.

The results come as Microsoft is said to be in discussions with Time Warner's AOL division about combining AOL with Microsoft's struggling online services division. CNNMoney.com is owned by Time Warner (TWX, Fortune 500).

Microsoft has also made offers to buy Internet search firm Yahoo (YHOO, Fortune 500). But Yahoo rejected Microsoft's offers and is instead negotiating an advertising partnership with search engine giant Google (GOOG, Fortune 500), which also posted a quarterly profit Thursday that feel short of expectations.

On the conference call after the earnings were reported, Liddell reiterated that they are still interested in purchasing the Yahoo search engine, and that the offer that Microsoft has on the table, "We believe is a compelling one."

However, one analyst is skeptical. Trip Chowdhry, senior analyst for Global Equities Research does not think that Microsoft's idea of purchasing Yahoo's search engine is realistic. "It is like someone going to General Motors and saying I will purchase your engine division," he said.

Chowdhry also thinks that the deal would not go through because it would face "immense scrutiny from Department of Justice" on the antitrust front.