Microsoft beats the Street - but can't escape legal bills

Microsoft reported on Thursday fiscal third quarter revenue above expectations but saw its earnings dented by the costs of a fine by the European Union and its settlement with Sun Microsystems.

The software maker said it earned $1.32bn, or 12 cents per share, on revenue of $9.18bn, for the three months ended 31 March. That compares with earnings of $2.14bn, or 20 cents per share, on revenue of $7.84bn in the same quarter a year earlier.

The results included stock-based compensation expenses that amounted to 5 cents per share and legal charges equalling 17 cents per share. Excluding those items, Microsoft would have had earnings of 34 cents per share, ahead of the 29 cent First Call estimate and the company's own predictions.

"All of our businesses met or exceeded our expectations this quarter," Microsoft CFO John Connors said in a statement on Thursday. "Overall corporate [information technology] spending continued to improve and we expect to see healthy demand through the end of our fiscal year."

For the current quarter, which ends in June, Microsoft predicted earnings per share of about 23 cents per share, including 5 cents worth of stock-based compensation expenses, on revenue in the range of $8.9bn to $9bn. Those figures are roughly in line with what analysts had been expecting from the software maker.

The earnings report shows that Microsoft's legal issues are taking a toll on the bottom line, though the company has more than $50bn in the bank. Last month the EU handed down a €497m fine against Microsoft, while the company has also paid out nearly $2bn in accordance with a settlement earlier this month with Sun.

Microsoft also offered guidance for the coming fiscal year, which ends in June 2005.

The company said to expect revenue in the range of $37.8bn and $38.2bn. Operating income is expected to be anywhere from $15.9bn to $16.3bn, including stock-based compensation expenses of approximately $2.5bn. That's expected to amount to per-share earnings of between $1.16 and $1.18, including stock-based compensation expenses of approximately 15 cents per share.

Microsoft said its cash and short-term investment balance rose to $56.4bn, up from nearly $53bn in December and $49bn a year earlier, and noted that its revenue for the quarter was boosted by the weak dollar. Had exchange rates been what they were a year ago, Microsoft said its revenue would have been $350m lower.

Microsoft shares were up 5.6 per cent, or $1.45 per share, to $27.40 in after-hours trading. Shares of the software giant were also up during the day, closing nearly 2 per cent, or 50 cents per share, higher at $25.95.

Ina Fried writes for CNET News.com.