Updated from April 15


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is making modest gains amid heavy trading Wednesday, following the company's good news/bad news announcement the previous afternoon. Shares of the Redmond, Wash., company were up 73 cents, or nearly 3%, to $25.34 in recent trading.

Sell-side reaction to Microsoft's solid third quarter and relatively weak outlook for fiscal 2004 has been muted, with little new in the way of guidance for longer-term investors. Still, today's rush of commentary on the company contained some useful tidbits

Rick Sherlund of Goldman Sachs noted that management said it will address the company's cash position (now $46 billion) at the July analyst meeting, "implying that they would announce a possibly more aggressive share repurchase program, largerdividend or other contemplated use of cash to better benefit the stock." Goldman has a banking relationship with Microsoft.

Eric Upin of Wells Fargo said, "We believe that management's slightly more cautious stance on last quarter's earnings call signaled that the factors that have driven Microsoft's historical outperformance (product upgrades, new product initiatives and shift to subscription licensing) will have run their course after the next twoto four quarters.

"As a result, Microsoft's growth moving forward will be more dependent onimprovements in the economic environment, PC shipments and IT spending," he wrote. Wells Fargo does not have a current banking relationship with Microsoft.

Will the IT spending environment improve? Microsoft isn't saying, most likely because the company doesn't know. During the call CFO John Connors said his forecast makes no assumptions about significant macro changes, although he did forecast continued sluggish PC growth.

On Tuesday the company posted solid third-quarter results, reporting earnings and revenue on the high side of the company's expectations.

However, as some analysts had feared, the world's largest independent software company set its revenue and profit projections for fiscal 2004 under Wall Street's expectations.

The post-close conference call with analysts and reporters was somewhat more upbeat than it was in January. "We had solid results no matter how you measure," said Connors. "The business is in good shape, and we are well-positioned."

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Connors did however, caution investors that "we continue to operate in a tough environment," and he noted that fragile consumer confidence and the general weakness in the global economy are issues that will continue to plague Microsoft through 2004.

Revenue for the March quarter was $7.84 billion, an 8% increase over the same period a year earlier. Net income for the quarter was $2.79 billion, or 26 cents a share, according to generally accepted accounting procedures. In the third quarter of 2002 the company earned $2.74 billion, or 25 cents a share.

Wall Street had expected the company to earn 24 cents a share on revenue of $7.7 billion. Guidance issued earlier by the company had projected EPS of about 23 cents to 24 cents a share, on revenue ranging from $7.7 billion to $7.8 billion.

Looking forward, the company expects fiscal 2004 revenue to range from $33.1 billion to $33.8 billion, compared to Wall Street estimates of $34.8 billion. Earnings, the company said, will range from $1.04 to $1.06 a share. Analysts polled by Thomson Financial/First Call are expecting a profit of $1.08.

For the last quarter of fiscal 2003, the company expects revenue to range from $7.8 billion to $7.9 billion, on the light side of Wall Street's expectations of $7.98 billion. EPS in the fourth quarter, Microsoft said, will be either 23 cents or 24 cents a share, in line with analyst's estimates.

Unearned revenue, called deferred revenue by many other companies, declined sequentially but was within the range that some analysts had expected, dropping to $8.5 billion, compared to $8.8 billion for the December quarter.

Unearned revenue (license income that is recorded but not booked until a future quarter when licenses are actually used) spiked during the first quarter, as tough new licensing rules prompted customers to upgrade.

More significant, said analyst Brian Skiba of Deutsche Bank Securities, was Microsoft's projection that the decrease in deferred revenue will end in the fourth quarter of 2003 and will, in fact, increase by $100 million to $200 million. "If it had continued to go down, it would have been a sign of trouble," he said.

Every segment of Microsoft's business increased during the Q3, with the exception of the Home and Entertainment business, which includes the Xbox video game console and software, PC games and the TV platform. Home and entertainment decreased by 42%, dropping from $778 million to $453 million, "primarily due to lower sales of Xbox consoles and related games and consoles in all geographic regions," the company said.

Significantly, the server platforms business, a key to Microsoft's continued push into enterprise computing, increased by 21%, driven by strong sales of Windows-based server shipments.

On April 24 the company will launch Server 2003 (formerly .Net Server), a product that should start a major push for server sales, Skiba said. Later in the year, Microsoft will launch a host of other new business products, including new versions of SQL, Exchange and Office.

But growth in Microsoft's desktop bailiwick will likely be hurt by slow PC sales; Connors said he expects PC shipment growth in the low- to mid-single digit range in the fourth quarter, and in the mid-single digits in fiscal 2004.