Microsoft Holds to Tough Yahoo! Stance

The software giant talks down claims of a growing Yahoo!
By Ivy Lessner ,

SAN FRANCISCO - Microsoft (MSFT) - Get Report sent strong signals on its conference call Thursday that Yahoo! (YHOO) investors should not hold out for more.

While Yahoo! has recently put forward lofty growth and valuation perspectives in an effort to extract a higher bid, "we see the opposite" as Yahoo! continues to lose search market share, Microsoft CFO Chris Liddell said.

Yahoo!'s most recent quarterly results were only in line with the guidance given in January, after which investors at the time took the stock down to close at $19.05, he added.

"We've been clear that speed is of the essence" to Microsoft's growth strategy for the online advertising and search markets, Liddell said. But Yahoo!s response to Microsoft's attempt to acquire its rival "has been anything but speedy" due to its unrealistic view of its corporate value, he added.

The rationale often given for why Microsoft should increase its bid price of $31 a share -- simply that we can afford to -- is not one that I favor," Liddell said.

Expectations that Microsoft would signal its next move was high. Liddell noted that twice the number of investors than usual were listening to the call. Microsoft has set a deadline of Saturday for Yahoo! to accept its $31 cash-and-stock offer.

On Thursday,

The Wall Street Journal

reported that CEO Steve Ballmer said Thursday in Milan that the company has no plans to boost its cash-and-stock offer and called the $44.6 billion at which the original bid was valued "a lot of money." He said Microsoft is "prepared to move forward alone without Yahoo."

Third-quarter revenue at the Redmond, Wash., software company was flat at $14.45 billion, vs. $14.4 billion in the same quarter of last year. Analysts were expecting $14.5 billion, according to Thomson Financial.

Third-quarter revenue grew 13.5%, normalizing 2007 figures for the recognition in the prior year's quarter of $1.6 billion of deferred revenue on technology guarantees and pre-shipments of Vista and Office 2007.

Net income fell 11% to $4.39 billion, or 47 cents a share, from $4.93 billion, or 50 cents a share, in the year-ago period. That did beat analysts' EPS expectations of 44 cents.

Shares were down $1.59, or 5%, to $30.21 in after-hours trading. Yahoo!'s shares were off 30 cents, or 1.1%, to $27.

For the fourth quarter, Microsoft said revenue would range from $15.5 billion to $15.8 billion. EPS will be 45 cents to 48 cents. Analysts were projecting a top line of $15.56 billion and EPS of 48 cents.

For the next fiscal year, the company projected revenue ranging from $66.9 billion to $68 billion and EPS of $2.13 to $2.19. Analysts were expecting revenue of $66.5 billion and EPS of $2.10.

Client software sales fell 24% year over year to $4 billion. Client revenue comparisons are more difficult because of the launch of the Vista operating system and Office 2007 software early in calendar 2007, Chief Accounting Officer Frank Brod said in an interview.

But adoption of Windows Vista continues apace, with 140 million copies installed by the end of the quarter, and another 10 million since, Brod said. In fact, client software revenue grew 16%, faster than worldwide PC unit shipment growth, he added.

IDC recently reported first-quarter PC shipments grew 14.6%.

Revenue in the entertainment and devices division grew 68% year over year to $1.6 billion, on continuing strong demand for the Xbox, which sold 1.3 million boxes during the quarter, surpassing 19 million units in total, Brod said. The attach rate, or number of games sold per Xbox, is now 7.5, up from 7 in the prior quarter.

And Microsoft is anticipating a strong release of the next version of

Grand Theft Auto

in May, Brod said.

The company's server and tools division, which released several upgrades during the past two quarters, reported third-quarter sales up 18% year over year to $3.26 billion.

In server software, Microsoft competes for market share against

Oracle

(ORCL) - Get Report

and

IBM

(IBM) - Get Report

, as well as open-source providers

Red Hat

(RHT) - Get Report

and

Novell

(NOVL)

.

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