Microsoft rakes in larger-than-expected pile of cash

Amid strong PC demand from consumers and businesses, Microsoft on Thursday reported quarterly revenue and earnings that topped the company's expectations.

It said it earned $2.9bn, or 27 cents per share, on revenue of $9.19bn for the three months that ended on 30 September. That compares with earnings of $2.6bn, or 24 cents per share, on revenue of $8.22bn in the same quarter a year ago.

In July, Microsoft forecast revenue of $8.9bn to $9bn, with earnings per share of 25 cents, including about 5 cents per share in stock-based compensation expenses. Microsoft said Thursday that its per-share earnings included 5 cents worth of compensation-related charges.

Microsoft CFO John Connors said in a statement: "We've had a strong beginning to what we expect will be a very good year with continued growth in both our commercial and consumer businesses. This quarter, we had a very healthy commercial server and desktop business driving double-digit revenue growth, and we expect to continue the trend of growing revenue faster than expenses as we work to make each of our businesses more efficient and profitable."

However, for the current quarter, which ends in December, Microsoft forecast revenue in the range of $10.3bn to $10.5bn. That's below the First Call consensus estimate of $10.7bn. Microsoft said it expects earnings per share to be 28 cents, including stock-based compensation expenses.

The company did raise its expectations for the full fiscal year, which ends in June. Microsoft said it now expects revenue of between $38.9bn and $39.2bn, with per-share earnings of $1.07 and $1.09, including compensation charges. In July, Microsoft had predicted revenue of between $38.4bn and $38.8bn and earnings per share of between $1.05 and $1.08.

Microsoft ended the quarter with $64.4bn in cash and short-term investments, compared with $60.6bn at the end of June. However, the company expects that figure to drop because it has a one-time payout of $3 per share slated for later this year, pending shareholder approval of changes to compensate Microsoft employees for the payout.

The company also expects to boost its stock repurchases in the coming months, though it actually spent less buying back shares last quarter than it did a year ago. The company said it spent $355m on stock repurchases last quarter, compared with $1.05bn in the same quarter a year earlier.

The company's balance of unearned revenue -- a highly watched indicator for future sales -- dropped to $7.78bn, a slightly larger decline than the company had predicted. The figure was down about $340m from the $8.18bn recorded a quarter earlier. Microsoft had predicted a drop of $200m to $300m.

On a conference call with analysts, Microsoft executives said the company is seeing customers taking longer to renew software contracts, typically taking more advantage of a 90-day grace period than they have in the past.

"They clearly do use the renewal period to hold out for discounting," Connors said, but added that the company is not seeing any "unnatural" discounting patterns nor are they giving different guidelines to the sales force than in the past.

While renewals of so-called Enterprise Agreements are taking longer, Microsoft said it is still seeing its typical renewal rates of 65 percent to 70 percent and the deals typically include more types of software than the agreements they replace.

"As we go to renew, we absolutely want to attach a lot more server [and other] software," Connors said. "That absolutely does take longer. We're fine doing that to get [higher] attach rates."

Although most of its contract deals continue to be for two or three years, Connors said the company is seeing some demand for even longer-term deals, especially by governments. Such contracts take longer to iron out, but typically involve more Microsoft products.

As it typically does, Microsoft also gave its forecast for the PC market, reiterating its expectation for slower growth in the coming year. The company said it expects 8 percent to 10 percent growth for its fiscal year, which ends in June, with business PC growth continuing to outpace that of consumer machines. On the server side, the company said it also things unchanged from July with an expectation of 13 percent to 15 percent growth.

As in other recent quarters, Microsoft's earnings benefited from a weaker dollar. The company said had it faced the same currency exchange rates as a year ago, its earnings would have been dented by $221m. The company also had lower payroll costs, primarily due to a $270m decline in stock-based compensation expenses as it has moved to awarding restricted stock instead of stock options.

The company's seven business units all posted gains in revenue and either grew their profits or, in the case of Microsoft's unprofitable units, narrowed losses.