Microsoft posts profit growth for fiscal third quarter

While analysts polled by Thomson Financial were expecting revenue of $11.04 billion, the $11 billion in revenue was a 13 percent jump over the same quarter a year ago, while the net income was a 16 percent increase over 2005's fiscal third quarter.

Microsoft reported operating income for the quarter of $3.89 billion, a 17 percent increase compared with $3.33 billion in the fiscal third quarter of 2005. The third-quarter 2006 operating income included $397 million for legal charges. In the 2005 third quarter, that amount was $768 million.

Microsoft attributed a portion of the revenue increase in the quarter to the fifteenth consecutive quarter of double-digit revenue growth in its server and tools business, most notably a 30 percent jump in SQL Server revenue. It was the highest revenue grossing quarter for SQL for the year.

"Revenue growth of 29 percent in the business group that have had recent product launches demonstrates our ability to choose the right places to focus our innovation efforts and make investments," said Chris Liddell, CFO of Microsoft. Liddell cited SQL Server as a specific example.

Microsoft also noted strong revenue gains in Microsoft Business Solutions and the Home and Entertainment division, which sells the Xbox game system.

While the Business Solutions group, which is integrating its lineup of business applications under the Dynamics brand name, posted a revenue gain of nearly 21 percent, it posted a net operating income loss of $13 million. The division has struggled to post profits, with its only profitable quarter coming last quarter when it showed $10 million in operating income, which is equal to earnings before deduction of interest payments and income tax. It's operating income loss, however, was down 67 percent over the $39 million loss from the same quarter a year ago.

Microsoft also reported that growth in its unearned revenue, an indicator of new volume licensing contracts, was up 14 percent over the same quarter a year ago.

Colleen Healy, senior directory of investor relations, said Microsoft showed strong renewal in Enterprise Agreement volume licensing contracts, which typically show a high renewal rate. But she added that Select and Open volume licensing contracts showed strong results relative to non-annuity licensing, although she did not provide specific numbers.

"Our bookings growth for the quarter was up nearly 15 percent overall and exceeded 10 percent for our core business of Client, Information Worker, and Servers and Tools.

Microsoft said it expects renewals of Enterprise Agreement volume licensing contracts to fall within historical levels of 75 percent for fiscal 2007. It did not present predictions for Open and Select volume licensing programs, which tend to show the most fluctuation.

The financial gains come in a quarter where Microsoft announced delays in the delivery of its Vista client operating system and the next version of its Office productivity software. Following the announcement of those delays, Microsoft shook up its management staff and endured wide-spread criticism of executives from its rank-and-file. In addition, the company continues to battle the European Union over bundling of its Media Player software with the Windows operating system.

Microsoft also said it plans to close its fiscal 2006, which ends June 30, with approximately $44 billion in revenue and $17.5 billion in operating income.