Patience Running Out for Microsoft

Microsoft gave its first pass at guidance for fiscal 2007, saying EPS will range from $1.36 to $1.41 on revenue ranging from $49.5 billion to $50.5 billion. Analysts had forecast a profit of $1.53 a share on sales of $49.5 billion.

Goldman Sachs analyst Rick Sherlund noted during the call that the company's spending plans for 2007 appeared to be $2.4 billion higher than expected, and he asked if Microsoft was "building a Google(GOOG - Cramer's Take - Stockpickr) inside of the company."

Liddell said that the company has "no Trojan horses," or secret projects, and that the money will be spent on projects that have been disclosed.

In the third quarter, the cost of revenue increase by 53% from $1.3 billion a year ago to $2 billion. Sales and marketing increased by about 14% in the quarter and R&D was up nearly 9%.

One big culprit: spending on the Xbox 360. Sales have gone up significantly, but because Microsoft loses money on every unit sold, the company's profitability suffers. Liddell said the delay of Sony's PlayStation 3 was an opportunity for Microsoft to grab share, and he forecast heavy spending on the console throughout the rest of the fiscal year, but not into 2007.

The company's Home and Entertainment segment, which makes the Xbox 360, increased revenue by 80% to $1.1 billion due to strong demand for the console. But the division's loss grew even faster, ballooning by 121% to $388 million.

The company's Client division, which sells Windows, grew by nearly 8% to $3.19 billion in sales while making a profit of $2.5 billion. The Information Worker business, which sells Office and other products, grew by 5% to $2.95 billion in sales and earned a profit of $2.1 billion.

Growth in other areas was more dynamic. Business Solutions, which runs Microsoft's fledgling enterprise applications business, grew revenue 20.7% to $216 million while narrowing its loss to $13 million from $39 million a year ago.