Microsoft (MSFT) fell 2 percent to $50.

"The primary risk is the margin risk in the earnings per share model," wrote Chris Shilakes, an analyst at Merrill Lynch.

Microsoft's quarter showed "one blemish," wrote George Gilbert, an analyst at CS First Boston. Operating margins came in at 43 percent vs. his expectations of 45 percent. One reason for the lowered margin was higher marketing expenses. Marketing expenses rose 20 percent sequentially, Gilbert wrote. This is surprising given that management was "boasting about the strictest expense controls in the company's history. We suspect Microsoft opened the spigots on some discretionary programs once they knew that revenues and the annuity contracts were in the bag."

Gilbert said that MSN broadband distribution agreements may have "consumed heavy upfront payments classified as marketing expenses."

The numbers

Late Thursday, the world's top-selling software company said it earned $1.53 billion, or 28 cents a share, in its fiscal fourth quarter, up from its year-ago $65 million, or 1 cent a share, as revenue climbed 10 percent to $7.25 billion.

The earnings included an after-tax charge for investment impairments of $806 million, or 15 cents per share. Excluding the charge, Microsoft earned 43 cents a share.

Analysts had been expecting Microsoft to report earnings of 42 cents a share, on sales of $7.1 billion, according to a consensus of 24 analysts polled by Thomson Financial/First Call.

"We are making some big bets next year," said John Connors, Microsoft's chief financial officer, referring to fiscal-year 2003, which started July 1. "We are entering this year very well positioned on many fronts. ... It is our expectation that things will improve modestly throughout the year."

Management said the company is gaining vs. the competition in core operating system, server application and database-management software markets. Connors added that Microsoft is seeing stronger adoption of the company's flagship Windows XP operating system, which drove double the desktop software growth he had expected in the quarter.

Despite its claims of market-share gains, Connors said the company is also being hit by customer-spending decreases, as belts are tightened. Microsoft scaled back its earnings estimate for fiscal 2003. The company expects profit in a range of $1.85 to $1.91 a share, on sales of $31.4 billion to $32 billion, up between 11 and 13 percent from fiscal 2002. Analysts had been expecting earnings of $1.92 a share, on sales of $31.9 billion, according to a survey conducted by Thomson Financial/First Call.

For the current quarter, ended September, Microsoft projects it will earn between 42 and 43 cents a share, on sales of $7 billion to $7.1 billion. Analysts had expected earnings of 42 cents on sales of $7.11 billion.

Some analysts had expected Microsoft to scale back targets for personal-computer sales in the first quarter, which affects more than half the company's overall revenue. But Connors says PC shipments will rise in a mid-single digit range or possibly higher in the fiscal-first quarter, due mostly to a weak year-ago comparison. He sees PC growth in a low to mid-single digit range for the fiscal year.

Microsoft's net income growth was aided heavily in the quarter, as the company said it lost only $617 million on investments in the period compared with its $2.6 billion loss in the same quarter last year. Microsoft also trimmed its research and development spending 13 percent to $1.18 billion, although total operating expenses increased about 2 percent.

Sales of desktop software rose 9 percent from last year to $4.97 billion, driven by a 20 percent spike in sales of desktop and hand-held operating systems. The company also reported strong desktop applications sales, driven by its Office software suite

Microsoft's enterprise software and services revenue was $1.35 billion, up 4 percent from the previous year. Microsoft said sales of Windows Server products rose 13 percent, driven by its SQL Server database-management software, which competes with software from IBM and Oracle Corp.