Microsoft Stock Tumbles on Lower Earnings Guidance
Shares of Microsoft Corp. tumbled 11 percent Friday, after the world's largest
software maker reported third-quarter profit that missed Wall Street expectations
and lowered its earnings guidance.
The tempered forecast which comes as Microsoft boosts research and development
spending left some analysts grappling with whether that decision will translate
to higher profit.
"If they want to continue to grow at an above-average rate, absolutely,
they've got to make these investments," Robert Toomey, an analyst with
E.K. Riley Advisors, said Thursday. "The problem is that it's squeezing
short-term earnings, and investors don't like that."
The company's shares fell $2.90, or 11 percent, to $24.35 in early trading
on the Nasdaq Stock Market, where it has traded in a 52-week range of $24.25
to $28.38 .
Microsoft said Thursday it earned $2.98 billion, or 29 cents per share for
the three months ended March 31, compared with $2.56 billion, or 23 cents per
share, in the same period a year earlier.
The most recent results included a charge of 3 cents per share for legal expenses.
However, the company said that, without rounding, it actually earned 28.6 cents
per share and took a charge of 2.6 cents per share. That means it would have
earned 31 cents per share.
Revenue for the three-month period was $10.9 billion, a 13 percent increase
over sales of $9.62 billion a year earlier.
Analysts polled by Thomson Financial were expecting earnings of 33 cents per
share, on revenue of $11.04 billion.
For the current fourth quarter ending June 30, Microsoft said it expects to
earn 30 cents per share, below the 34 cents per share that analysts had been
The company also said it expects to see revenue of between $11.5 billion and
$11.7 billion for its fiscal fourth quarter. Analysts, on average, have been
predicting revenue of $11.64 billion for that quarter.
For the fiscal year ending in June 2007, Microsoft said it expects to earn
between $1.36 per share and $1.41 per share on revenue of $49.5 billion to $50.5
Some analysts were expecting earnings to be much higher during that period.
In an interview with The Associated Press, Chief Financial Officer Chris Liddell
said the third quarter earnings and outlook are below Wall Street's estimates
in part because the company has decided to increase research and development
spending in areas where it isn't a market leader but sees potential.
These include things like security, high-performance computing and voice over
Internet Protocol, VoIP, or Internet calling.
Microsoft also is hoping to make more progress in delivering and offering software
as a Web-based service. That's an area where companies ranging from Google Inc.
to Salesforce.com Inc. are making significant headway.
In the current quarter and beyond, Microsoft also plans to invest more heavily
in its Internet properties, MSN and Windows Live, Liddell said. And it is also
gearing up for a major marketing expenditures associated with the launch of
new versions of Windows and Office, which will be available to consumers in
Microsoft has long sought to push into markets as varied as video game consoles
and small business accounting software because the market for its flagship Windows
operating system and Office software suite is growing saturated in many areas.
But such a push also puts Microsoft head-to-head with fierce adversaries.
"It's not going to be a wide open field like PC operating systems were
10 and 15 years ago," Toomey said. "It's a different playing field,
and so they do have more competition and that creates increased risk, absolutely."
In the third quarter, Liddell said Microsoft also had higher-than-expected
expenses for Xbox 360, because of the cost of rushing to get consoles into consumers'
hands amid a shortage. Microsoft loses money each time it sells an Xbox 360,
although the eventual goal is to break even.
Liddell said third quarter revenues were below expectations because of lower-than-expected
sales of games for the first Xbox game console.
For the nine months ended March 31, Microsoft earned $9.78 billion or 92 cents
per share, on revenue of $32.48 billion. That compares with earnings of $8.56
billion or 78 cents per share, on revenue of $29.63 billion, in the same period