Microsoft's 4Q Revenues Jump, But Legal Costs Squeeze Profits

SQL Server, Visual Studio, and Dynamics applications drive sales growth. CFO Liddell outlines the company's fiscal 2007 spending plans.

Aaron Ricadela, Contributor

July 20, 2006

3 Min Read

Microsoft's fourth-quarter profit dropped 24% on legal costs related to a European Union antitrust fine, but shares of the company's stock climbed in after-hours trading on news it plans buy back up to $40 billion in stock.

Fourth-quarter revenue increased 16% to $11.8 billion on strong sales of the Xbox 360 video game console, which padded sales even as it drained profits. Microsoft loses money on each unit sold. Strong sales of Microsoft's SQL Server database software, Visual Studio development tools, and Dynamics business software also helped results. PC shipments grew about 10% during the June quarter, market researchers Gartner and IDC said this week.

Microsoft incurred $351 million in legal expenses during the quarter ended June 30, after the EU levied new fines against the company this month for failing to comply with a 2004 antitrust settlement. As a result, Microsoft reported net income for the quarter of $2.83 billion, or 28 cents per share, compared with $3.7 billion, or 34 cents per share a year ago. Analysts had expected Microsoft to earn 30 cents a share during the quarter.

Shares of Microsoft closed Thursday at $22.85, down 55 cents, but rallied nearly 6% higher in after-hours trading on Thursday evening. On July 21, Microsoft begins a tender offer to buy $20 billion worth of company shares from stockholders by Aug. 17. Microsoft's board also approved the repurchase of up to $20 billion of additional shares over the next five years. Investors have been clamoring for Microsoft to buy back more of its stock, which has the effect of increasing earnings per share, causing a company's share price to rise. Microsoft's stock has been stuck in a five-year rut, trading between $21.46 and $28.30 over the past year.

CFO Chris Liddell gave investors new details about $2.4 billion in new spending for the current fiscal year, which started July 1. Microsoft plans to spend $900 million on increased sales and marketing, including $450 million to launch Windows Vista and Office 2007 early next year and to promote Xbox.

The company has budgeted $1 billion for development of new products in areas such as computer security, business-intelligence, high-performance computing, Internet TV, and mobile-phone software, and for basic research. And it plans $500 million in additional spending to develop Internet search engines and other software that can compete with products from competitors including Google and Yahoo. The overall price tag includes the cost of building new data centers to serve that software. Microsoft expects to open a new data center in Quincy, Wash., in February.

Overall operating expenses will rise to $2.7 billion this year, as Microsoft budgets an additional $300 million for higher selling costs and accounting for future acquisitions, Liddell said.

Many of Microsoft's businesses are in transition as the company prepares for the releases of Windows Vista and Office 2007. Microsoft is also making management and technical changes to its MSN Internet advertising business. Perhaps most important, chairman Bill Gates said in June he would leave his day-to-day role at the company in July 2008.

For the 2006 fiscal year, Microsoft reported revenue of $44.3 billion, an 11% increase, and net income of $12.6 billion, up 2.8%. For the first quarter of fiscal 2007, the company forecast revenues of $10.6 billion to $10.8 billion, and earnings per share of 30 cents to 32 cents per share. Analysts had expected nearly $11 billion in revenues and earnings of 31 cents per share. For the full year, Microsoft expects revenues of $49.7 billion to $50.7 billion, and earnings of $1.43 to $1.47 per share.

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