Expenses Grow in Q3'06

Continuing strong sales of SQL Server and a ramp-up in Xbox 360 production boosted Microsoft revenue to US$10.90 billion in the quarter ending Mar. 31, 2006 (Q3’06), an increase of 13% over the same quarter last year. This is a notable acceleration in revenue growth—Q2’06 and Q1’06 showed only 9% and 6% revenue growth over their year-ago predecessors. However, Microsoft warned that investments in new businesses, particularly Xbox and online services, as well as new sales and marketing initiatives, will increase expenses, and the company lowered its profit estimates for FY’06.

(For an overview of the quarter’s financials and how they compare with previous quarters, see “Microsoft Financials for the Last Five Quarters“.)

Microsoft also gave its first guidance for FY’07, which will begin July 1, 2006, and will probably include the release of new editions of the company’s two most important products, Windows and Office. The company expects revenue between US$49.5 billion and US$50.5 billion, a growth rate of between 12% and 14%, up slightly from expected growth of 11% in FY’06. The company expects to earn between US$18.7 billion and US$19.2 billion in operating income in FY’07, for a growth rate of between 11% and 15%. (Operating income measures Microsoft’s revenue from normal operations minus the everyday costs of doing business and does not include taxes or gains and losses from investments; it does include the cost of legal settlements.)