Microsoft net profit up, but shares slip on outlook

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July 22: Microsoft Corp’s fourth-quarter profit rose nearly by 40% on a tax gain and strong demand for personal computers using its software, but a weaker-than-expected revenue outlook fanned fears that growth is slowing, and shares fell by 2%.

The world’s biggest software-maker said its net profit rose to $3.70 billion, or 34 cents per share, in the fiscal fourth quarter ended on June 30, up 38% from $2.69 billion, or 25 cents per share, a year earlier, topping Wall Street’s target by about 6 cents per share, according to Reuters Estimates. Excluding a tax benefit and legal- and stock-based compensation charges, the profit was 33 cents per share, 2 cents higher than what Wall Street predicted, and the revenue rose to $10.16 billion from $9.29 billion on strong demand for PCs, the main driver of sales for Microsoft’s Windows, Office and Server software products. The yearly revenue grew by 8% to $39.79 billion, Microsoft’s slowest yearly growth since going public in 1986.

Alan Davis, analyst at McAdams Wright Ragen, said the cautious outlook for the current fiscal first quarter spooked the market, triggering a sell-off in after-hours trade following a run-up in the stock over the last three days. The company expects to earn between 29-31 cents per share for the current quarter, on revenue of $9.7-9.8 billion. Analysts had been expecting earnings of 30 cents per share and revenue of $9.95 billion, according to Reuters Estimates.

Chris Liddell, who recently left International Paper Co to become chief financial officer at Microsoft, said the company would return to a double-digit revenue growth for the fiscal year to June 2006. “We came out of the (fiscal 2005) year at 8% revenue growth and you’ll see we’re guiding for 10-12%, or double digit growth, for next year,” Liddell told Reuters.

Liddell said Microsoft would get a boost from the release of the company’s next-generation Xbox 360 gaming console this year, new database software and contract renewals for the next version of Windows, code-named Longhorn.

“There’s a lot of investors in this market who think the company won’t be able to sustain this type of performance in the future and that is why we are seeing such a lukewarm response to the results,” said Fred Burke, a fund manager at Johnson Lemon Asset Management in Washington, who owns shares of Microsoft. He added that he believed in Microsoft growth.