Deferred revenue drives Microsoft to solid Q3

After taking into account $0.02 in tax benefits and $0.01 in legal charges, earnings per share for the quarter were $0.49, which was $0.03 higher than estimates from Thomson Financial analysts. Revenue was slightly higher than Microsoft expected for the quarter; the company had predicted revenue in the range of $13.89 billion and $14 billion. Last year, the company earned $10.9 billion in revenue for the same period. Microsoft also beat its own guidance for EPS, which had been in the range of $0.45 to $0.46.

After delaying the release of both its Vista client OS and Microsoft Office 2007 from its fiscal second quarter to early in its third quarter, Microsoft deferred $1.67 billion of revenue and operating income, $1.14 billion of net income and $0.12 of diluted earnings per share into the third quarter. This had a positive effect on the quarter's results.

Wall Street analysts had expected an in-line quarter for the company, as Microsoft had played down the revenue impact from Vista so the company would not get slammed by the street if earnings were less than anticipated. However, Vista did a little better than the company predicted, which drove revenue up slightly higher than estimates.

Vista revenue will continue to play a key role in Microsoft's client business though fiscal 2008, Microsoft CFO Chris Liddell said on a conference call following the results. The company predicts the percentage breakdown between sale revenue from Vista and Windows XP will be 85 percent to 15 percent in that time frame. However, Microsoft will adjust revenue guidance for its client business if that mix changes, he said.

"Obviously, the faster the transition to Vista, the bigger and more positive the impact will be in '08," Liddell said.

Net cash flow from operations was $7.29 billion for the quarter, and Microsoft returned $7.72 billion in cash to shareholders through share buybacks and dividends in the quarter.

Microsoft continued its conservative trend for its fiscal fourth quarter guidance. The company expects revenue in the range of $13.1 billion to $13.4 billion, and diluted EPS in the range of $0.37 to $0.39 for the quarter, which ends June 30.

Microsoft also made predictions for its next fiscal year, which ends June 30, 2008. Microsoft expects revenue in the range of $56.5 billion to $57.5 billion, and diluted EPS in the range of $1.68 to $1.72.

Looking ahead over the next 12 months, Liddell said Microsoft revenue should be positively affected by another wave of major product releases. Windows Server "Longhorn," a long-awaited update, is due in the second half of calendar 2007, while new versions of Microsoft CRM (customer relationship management) software, the Visual Studio developer tools and the popular Xbox game Halo also are due during this time.

New offerings, too, will appear on the market in the next year, including the Microsoft Expression Studio multimedia Web-design toolkit, the business antivirus software Forefront Client Security and Microsoft's Live CRM hosted service.