Microsoft blasts out strong fourth quarter, year

Updated post includes corrected net income increase and additional comments from Microsoft.

Microsoft on Thursday reported a 13 percent increase in fourth quarter revenue and a 7.3 percent rise in net income, as sales to business customers continued to support longer-term investments in its unprofitable online services and consumer devices businesses.

The software giant saw double-digit revenue and income increases from its three largest divisions--Client, Server and Tools, and Business--for the quarter ending June 30, 2006.

Quarterly revenue was $13.37 billion with diluted earnings per share at 39 cents--in line with analysts' expectations--which was knocked down to 31 cents per share because of its decision to take a $1 billion charge for extending Xbox warranties. Annual revenue climbed to more than $51 billion--a 15 percent increase--and net income topped $14 billion.

The company also upped fiscal year 2008 guidance. It forecast double-digit revenue and earnings growth next year from anticipated server product upgrades, including Windows Server and SQL Server, and from sales of Xbox 360 consoles.

"Our results this quarter cap off an extremely strong fiscal year for the company," said Chris Liddell, chief financial officer at Microsoft, in a statement. "We have healthy core businesses and are strategically investing in growth opportunities."

During a conference call with financial analysts, Liddell said that Microsoft intends to launch Windows Server 2008, SQL Server 2008 and its next edition of Visual Studio in February of next year.

Colleen Healy, Microsoft's general manager of investor relations, said Thursday that Windows Vista, released at the beginning of the year, was off to a strong start as consumers buy new PCs and corporate customers upgrade. She noted that customers who purchase volume annuity licenses grew 25 percent in the quarter.

Other good performances came from its customer relationship management application, which increased by 80,000 seats in the quarter. Microsoft also saw a double-digit increase at 33 percent in advertising revenue at Microsoft's online services business, she said.

Although Microsoft managed to rapidly grow its large mature businesses, analysts noted that its emerging businesses in online services and consumer hardware are still not profitable despite heavy investments in them.

Technology Business Research analyst Alan Krans said making those units profitable is vital to Microsoft's long-term strategy because it could see erosion of its desktop software business from online competitors or open source.

"Without a new source of profitable revenue growth, Microsoft faces the prospect of being a highly profitable, but slowly shrinking software company," Krans wrote in a research note.

For the coming year, however, Microsoft is projecting revenue growth across the board.

Liddell said that anticipated growth in PC shipments over the coming year will help fuel the company's expectation for continued uptake of Windows Vista, with consumer buyers outpacing corporate customers' PC purchases.

Microsoft executives also indicated that the company intends to ship its Halo 3 game in September this month. Microsoft's Entertainment and Devices Division will be profitable next fiscal year, Liddell said.

Bernstein Research analyst Charles DiBona said that "consensus expectations under-appreciate the potential positive impact of the impending Windows Vista cycle" in the coming year. He added that the solid fiscal year past pave the way for a discussion of Microsoft's longer-term strategy at its day-long financial analyst meeting next Thursday.