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 The software maker gave Wall Street a first peek at guidance for next year indicating that strong worldwide sales would overpower hiccups in the U.S. economy that could depress information technology spending.
But investors disappointed with Microsoft's more immediate outlook for the current fourth quarter and with weaker-than-expected sales in the division responsible for Windows sent shares down 5 percent in after-hours trading.
Before diving into quarterly results Thursday, Microsoft Chief Financial Officer Chris Liddell spent a few minutes on a conference call with analysts reiterating the company's stance on its stalled bid to buy Yahoo Inc. In February, Yahoo's board rebuffed Microsoft's offer
-- worth $44.6 billion at the time -- saying it undervalued the company. Since then, the value of the offer has fluctuated with Microsoft's share price; it was worth $44.06 billion Thursday.
"Unless we make progress with Yahoo towards an agreement by this weekend, we will reconsider our alternatives," he said. "These alternatives clearly include taking an offer to Yahoo shareholders or to withdraw our proposal and focus on other opportunities."
Microsoft CEO Steve Ballmer made similar comments in a speech in Italy on Wednesday, when he said his company is "prepared to move forward alone without Yahoo."
Liddell said Microsoft will issue an update on the Yahoo situation next week.
In the quarter ended March 31, Microsoft's profit fell 11 percent to 4.39 billion, or 47 cents per share, from $4.93 billion, or 50 cents per share, in the same period last year, when the software maker reported more than $1 billion in deferred revenue tied to delays in the launch of the Windows Vista operating system.
Revenue edged up to $14.45 billion from $14.4 billion in the year-ago quarter.
The results came in ahead of Wall Street's expectations on both measures. Analysts surveyed by Thomson Financial forecast a profit of 44 cents per share on $14.4 billion in sales.
Sales of Windows software were not as strong as Microsoft or analysts had predicted in the quarter, despite Microsoft's comments that sales of Vista licenses
-- now at 140 million, up from 100 million in January -- are on track.
Revenue in that division fell 24 percent to $4.02 billion. While the miss wasn't quite that grand
-- that figure doesn't take into account a tough comparison with the year-ago quarter, when Microsoft booked $1.67 billion in deferred Vista revenue
-- analysts were disappointed.
"It just seems like people, including myself, everybody kind of got a little too comfortable with them being conservative," said Cowen and Co. analyst Walter Pritchard, who expected the company to sail past guidance as it has done in recent quarters.
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 Microsoft's miss was fueled by a few factors. Even though research groups like Framingham, Mass.-based IDC reported that PC shipments were better than expected in the quarter, Microsoft's independent calculation showed fewer PC shipments than expected.
The company has also seen increases in revenue in the last two quarters as people who once would have bought pirated software spent money on genuine Microsoft software instead. But in the third quarter, Microsoft wasn't able to get the bump it had expected. Liddell said a rash of unlicensed software in China kept Microsoft from meeting its targets.
Finally, Microsoft said inventory levels were high among some computer sellers at the end of the second quarter, which may have kept them from restocking as much as expected in the third quarter.
Sales in the segment that sells the Office productivity suite and other business applications edged down 2 percent to $4.75 billion from a year ago. Liddell said weak sales of Office to consumers and in Japan overall hurt the segment.
Server and tools sales rose 18 percent to $3.3 billion, helped by the launch of new versions of Windows Server and other major software franchises.
Revenue from the division responsible for the Xbox 360 video game system ballooned 68 percent to $1.58 billion, which Microsoft attributed to robust demand for game consoles.
Microsoft's online services business, which makes money primarily by selling advertising online, saw sales rise 40 percent to $843 million, but the division widened its operating loss in the quarter.
Microsoft upped its fiscal fourth-quarter guidance to a profit of 45 cents to 48 cents per share, barely meeting Wall Street's current view for 48 cents per share. The software maker forecast $15.5 billion to $15.8 billion in sales. Analysts were expecting revenue of $15.56 billion.
Microsoft also gave its first guidance for next fiscal year, which ends in June 2009. The company predicts a profit of $2.13 to $2.19 per share, on sales from $66.9 billion to $68.0 billion. Wall Street is currently looking for a profit of $2.10 per share on $66.52 billion in sales.
Investors sent shares down $1.60 to $30.33 in after-hours trading. Earlier in the day, the stock had gained 35 cents, or 1.1 percent, to close at $31.80.
[Associated Press; By JESSICA MINTZ]
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