Microsoft's Steady Growth

Despite costly Xbox repairs, the software titan turned in a solid fiscal fourth-quarter performance, and raised revenue guidance for 2008

Say what you will about Microsoft, but for a mature company that makes most of its money in a slow-growing end of the tech business, the software giant continues to grow at a respectable pace. Microsoft (MSFT) met analysts' expectations in its fiscal fourth quarter and raised forecasts for the coming year to a level many analysts had already targeted. "Our fourth-quarter performance capped another very strong year," Microsoft Chief Financial Officer Chris Liddell said on a conference call with analysts, investors, and the media.

Microsoft's quarterly operating income fell just shy of $4 billion, up 3% from a year earlier, as sales increased 13%, to $13.4 billion. A one-time charge related to repairs for flawed Xbox 360 consoles shaved nearly $1.1 billion from operating income (see, 7/6/07, "Microsoft's Billion-Dollar Fix"). For the year, Microsoft's operating income hit $18.5 billion, up 12%, on a 15% gain in sales, which rose to $51.1 billion.

Revised Guidance

The results follow a series of solid quarters, perhaps giving investors more confidence in a stock that has traded sideways for the better part of six years. "It's yet another positive quarter that's going to get more people comfortable," says Charles Di Bona II, senior research analyst at Sanford C. Bernstein.

The solid quarter led Microsoft to raise fiscal 2008 revenue guidance given in April by roughly $300 million. Now Microsoft believes it will generate $56.8 billion to $57.8 billion in the current fiscal year, up about 12% from the year just closed. And the company increased its operating income guidance $200 million from April. It's now projecting operating income of $22.2 billion to $22.7 billion in the current fiscal year, up roughly 21% from fiscal 2007.

Baked into the new guidance is Microsoft's expectation that sales in its Entertainment & Devices Div., which includes the Xbox unit, will climb 10% to 19% in fiscal 2008. The wide range is notable because it gives the unit's management the flexibility to cut console prices during the year, something most analysts expect, particularly after Sony (SNE) reduced prices on the most recent iteration of the PlayStation console (see, 7/9/07, "Sony's Surprising PS3 Price Cut"). "My operating assumption is that you get a price cut before Christmas," Di Bona says. He says the reduction wouldn't come until after the Sept. 25 release of Halo 3, the follow-up to two of the hottest-selling titles in video game console history.

Vista Makes Good

The fourth quarter was buoyed by double-digit revenue growth in every business unit except the Entertainment & Devices Div., where Xbox sales fell short of expectations. But solid sales of Windows Vista, introduced in January, helped Microsoft's client unit revenue grow 14%, to $3.8 billion. The Business Div., which includes the 2007 Microsoft Office system, also launched in January, saw revenue climb 19%, to $4.6 billion. The company's Server & Tools unit, long the engine of the company's results, posted a 15% revenue gain, to $3.1 billion.

Even Microsoft's Online Services Business, which continues to trail Google (GOOG) in virtually all things Web-related, saw its sales climb 19%, to $688 million, reflecting a 33% increase in ad revenue. Still, the unit's losses expanded to $239 million, from $187 million in the year-ago period, as Microsoft invested in new technology and increased the group's workforce.

Microsoft will elaborate on the current fiscal year at its annual financial analysts meeting on July 26. The fourth-quarter results will likely put the crowd in a more friendly mood than they have been in recent years. "It sets the table nicely for next week," Di Bona says.

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