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Microsoft's Q3 hurt by settlement costs

Sun puts small dent in golden egg

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Microsoft celebrated solid revenue growth in its third quarter but felt the pains of recent legal settlements with net income falling year-over-year.

Microsoft reported $9.18bn in revenue for the period ended 31 March. This marks a 17 per cent increase over the $7.84bn posted in the same quarter a year ago.

The company's net income total came in at just $1.32bn. This total includes $501m in after-tax charges for stock-based compensation and $1.89bn in after-tax charges for Microsoft's recent settlement with Sun Microsystems and fines imposed by the European Commission.

In the same quarter last year, Microsoft reported $2.14bn in net income, including a $655m after-tax charge for stock-based compensation.

Microsoft's CFO John Connors steered clear of the charges in a brief statement about the Q3 results.

"Broad-based demand and solid execution across all our businesses drove outstanding results for the quarter," Connors said. "All of our businesses met or exceeded our expectations this quarter with the Client, Information Worker and Server and Tools businesses growing a combined 17 per cent. Overall corporate IT spending continued to improve and we expect to see healthy demand through the end of our fiscal year."

Microsoft clearly took a hit for the $590m fine handed down by the EU, and its $2bn settlement with Sun. The payments, however, did little to stop the cash juggernaut. Microsoft now has $56.4bn in cash and short-term investments compared to $53bn in the previous quarter and $49bn a year ago. Favorable exchange rates helped Microsoft out in the third quarter.

Microsoft's main businesses all showed gains during the quarter. Its client business pulled in $2.9bn versus $2.5bn in the same quarter last year. The server business jumped to $2.2bn from $1.8bn, and the Office business grew to $2.7bn from $2.3bn.

Microsoft's MSN business posted $591m in revenue compared to $508m last year. Online advertising and paid search drove the growth, showing a 43 per cent year-over-year surge in revenue. MSN subscription revenue declined $17m, leaving Microsoft with 8.2m subscriptions.

Its Xbox producing home entertainment biz upped revenue to $530m from $453m. Unit sales of the Xbox increased 30 per cent. Its SMB software group also upped revenue to $153m from $147m.

Mobile sales are still coming along quite slowly. The mobile group generated just $61m in sales compared to $46m last year.

Microsoft expects fourth quarter revenue to come in between $8.9bn and $9.0bn. Full the full year, Microsoft is looking for revenue between $37.8bn and $38.2bn. ®

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