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Microsoft Shares Sink On Mixed Earnings Report, Disappointing Forecast

For the fiscal fourth quarter, Microsoft said sales increased 18% over the prior year to $15.8 billion. Net income rose 41% to $4.3 billion.
Shares of Microsoft declined more than 8% in midmorning trading Friday after the company posted fourth quarter earnings results on Thursday that failed to meet analysts' expectations and provided future guidance that disappointed some market watchers.

For the fiscal fourth quarter 2008, ended June 30, Microsoft said sales increased 18% over the prior year to $15.8 billion. Net income rose 41% to $4.3 billion while earnings per share climbed 48% to 46 cents.

Excluding the impact of a one-time, $1.1 billion charge to cover Xbox warranty costs that Microsoft took in the fourth quarter of 2007, the company's fourth quarter 2008 net income increased a more modest 14% while earnings per share rose 18%.

While the growth numbers were strong, financial pros had been expecting more. Wall Street analysts surveyed by Thomson Reuters, on average, expected per-share earnings from Microsoft of 47 cents. As a result, Microsoft shares were down more than 8% to $25.28 at one point on Friday morning.

Microsoft's fourth quarter financials were a mixed bag. The company saw solid growth in sales of its Windows Vista operating system, which helped its Client unit increase revenue 15% to $4.4 billion. Business sales of Microsoft's Office desktop suite jumped 19%. That was partly offset, however, by a 7% decline in consumer sales as some customers turn to free desktop offerings from rivals like Google and IBM.

Sales of business server software showed a strong, double-digit increase of 21%, helped along by this year's launches of the 2008 versions of Windows Server, SQL Server, and Visual Studio.

But losses at Microsoft's key Online Services unit -- which the company is looking to bolster through a billion dollar buyout of Yahoo's search operations -- widened significantly to $488 million. Microsoft blamed much of the loss on investments in data center equipment needed to power next-generation hosted search and application services.

Online services revenue grew 24% to $838 million, but most of the gain was the result of Microsoft's integration of aQuantive, an Internet ad agency that the company acquired last year for $6 billion.

Sales at Microsoft's Entertainment and Devices unit, home to the Xbox 360 gaming console, climbed 37% to $1.58 billion on the back of strong console and video game sales.

For the current quarter, Microsoft said it expects to post revenue of between $14.7 billion and $14.9 billion, on earnings per share of between 47 cents and 48 cents. Wall Street analysts were expecting earnings for the quarter to come in at 49 cents on revenue of $15.1 billion.

For its full fiscal year 2008, which ended June 30, Microsoft said revenue increased 18% over the previous year to $60.4 billion, while net income rose 26% to $17.7 billion and earnings per share gained 32% to $1.87.