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Microsoft Stock Tumbles on Lower Earnings Guidance

Shares of Microsoft Corp. tumbled 11 percent Friday, after the world's largest software maker reported third-quarter profit that missed Wall Street expectations and lowered its earnings guidance.

The tempered forecast which comes as Microsoft boosts research and development spending left some analysts grappling with whether that decision will translate to higher profit.

"If they want to continue to grow at an above-average rate, absolutely, they've got to make these investments," Robert Toomey, an analyst with E.K. Riley Advisors, said Thursday. "The problem is that it's squeezing short-term earnings, and investors don't like that."

The company's shares fell $2.90, or 11 percent, to $24.35 in early trading on the Nasdaq Stock Market, where it has traded in a 52-week range of $24.25 to $28.38 .

Microsoft said Thursday it earned $2.98 billion, or 29 cents per share for the three months ended March 31, compared with $2.56 billion, or 23 cents per share, in the same period a year earlier.

The most recent results included a charge of 3 cents per share for legal expenses. However, the company said that, without rounding, it actually earned 28.6 cents per share and took a charge of 2.6 cents per share. That means it would have earned 31 cents per share.

Revenue for the three-month period was $10.9 billion, a 13 percent increase over sales of $9.62 billion a year earlier.

Analysts polled by Thomson Financial were expecting earnings of 33 cents per share, on revenue of $11.04 billion.

For the current fourth quarter ending June 30, Microsoft said it expects to earn 30 cents per share, below the 34 cents per share that analysts had been predicting.

The company also said it expects to see revenue of between $11.5 billion and $11.7 billion for its fiscal fourth quarter. Analysts, on average, have been predicting revenue of $11.64 billion for that quarter.

For the fiscal year ending in June 2007, Microsoft said it expects to earn between $1.36 per share and $1.41 per share on revenue of $49.5 billion to $50.5 billion.

Some analysts were expecting earnings to be much higher during that period.

In an interview with The Associated Press, Chief Financial Officer Chris Liddell said the third quarter earnings and outlook are below Wall Street's estimates in part because the company has decided to increase research and development spending in areas where it isn't a market leader but sees potential.

These include things like security, high-performance computing and voice over Internet Protocol, VoIP, or Internet calling.

Microsoft also is hoping to make more progress in delivering and offering software as a Web-based service. That's an area where companies ranging from Google Inc. to Salesforce.com Inc. are making significant headway.

In the current quarter and beyond, Microsoft also plans to invest more heavily in its Internet properties, MSN and Windows Live, Liddell said. And it is also gearing up for a major marketing expenditures associated with the launch of new versions of Windows and Office, which will be available to consumers in early January.

Microsoft has long sought to push into markets as varied as video game consoles and small business accounting software because the market for its flagship Windows operating system and Office software suite is growing saturated in many areas.

But such a push also puts Microsoft head-to-head with fierce adversaries.

"It's not going to be a wide open field like PC operating systems were 10 and 15 years ago," Toomey said. "It's a different playing field, and so they do have more competition and that creates increased risk, absolutely."

In the third quarter, Liddell said Microsoft also had higher-than-expected expenses for Xbox 360, because of the cost of rushing to get consoles into consumers' hands amid a shortage. Microsoft loses money each time it sells an Xbox 360, although the eventual goal is to break even.

Liddell said third quarter revenues were below expectations because of lower-than-expected sales of games for the first Xbox game console.

For the nine months ended March 31, Microsoft earned $9.78 billion or 92 cents per share, on revenue of $32.48 billion. That compares with earnings of $8.56 billion or 78 cents per share, on revenue of $29.63 billion, in the same period last year.

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