Consumer sales push Microsoft results up

Microsoft Corp. on Thursday reported an increase in earnings and revenue for its first fiscal quarter, citing strong demand from consumers which helped offset a slow recovery in corporate IT spending.

The Redmond, Washington, software vendor also slightly upped its revenue and earnings estimates for its full 2004 fiscal year, which ends in June 2004.

Net income for the quarter ending Sept. 30 came to US$2.61 billion, or US$0.24 a share, which includes equity compensation expenses of US$680 million, or US$0.06 a share. For the same quarter a year earlier, Microsoft reported net income of US$2.04 billion, or US$0.19 a share, including charges of US$993 million or US$0.09 a share, the company said in a statement.

The earnings beat analysts' expectations by a penny. Excluding the compensation expenses Microsoft earned US$0.30 a share for the quarter. Analysts polled by Thomson Financial had been expecting US$0.29 a share, in line with Microsoft's earnings guidance given in July.

Revenue amounted to US$8.22 billion, up 6 percent year-on-year from US$7.75 billion, beating the analyst consensus estimate of US$8.08 billion. Microsoft's own revenue guidance was for between US$7.9 billion and US$8.1 billion.

Microsoft profited from double-digit growth in PC shipments in the past quarter. In July the company predicted only mid-single digit growth in PC shipments for its full 2004 fiscal year.

"PC demand for the first quarter was much better than we had forecasted across all geographies, but particularly in Japan, the U.S. and Europe," said John Connors, chief financial officer at Microsoft, in a conference call.

"Even though corporate IT spending has been slow to recover, we delivered another solid quarter. Our performance was driven by robust consumer PC demand and particularly good results from our emerging businesses MSN, Home and Entertainment, and Mobility and Embedded Devices," Connors said.

In response to the sales increase, Microsoft has adjusted its outlook slightly. For its financial year ending June 30, 2004, the software maker now expects revenue between US$34.8 billion and US$35.3 billion and earnings per share between US$0.86 and US$0.88, including equity compensation charges of about US$0.24. That's up from its July estimate of revenue between US$34.2 billion and US$34.9 billion, and earnings per share between US$0.85 and US$0.87, including the US$0.24 compensation expense.

For the quarter ending Dec. 31 the company expects revenue of between US$9.7 billion and US$9.8 billion, with earnings per share in the range of US$0.23 or US$0.24, including an expense for equity compensation of about US$0.06.

In its full year forecast, Microsoft is counting on a "modest" improvement in corporate IT spending starting in January, the second half of Microsoft's financial year, Connors said.

Microsoft had been too optimistic about corporate spending, Connors said. The amount of unearned revenue on Microsoft's balance sheet for multiyear licensing contracts took a bigger hit than the company expected, dropping from US$9.02 billion on June 30 to US$8.25 billion on Sept. 30. Microsoft had forecast unearned revenue to drop by no more than US$300 million.

Microsoft blames the drop on a slow start in the quarter, reorganization in the sales force and seasonal factors. Also, the company was distracted from selling software because of security issues such as the Blaster worm.

"Security concerns after a few very high profile attacks in the latter half of the quarter diverted the focus of our customers, our sales force and the channels away from new deals and renewals," Connors said.

Analysts on the conference call expressed concerns about the drop in unearned revenue, suggesting that it may indicate that software buyers are not renewing or signing new multiyear subscription deals under Microsoft's Software Assurance (SA) scheme.

Customers may be less interested in Microsoft's SA plan because of the lack of new products in the near horizon, the analysts said. Longhorn, the code name for the next Windows client, isn't expected until 2006. It will be accompanied by a slew of other new Microsoft products. One reason customers sign up for SA is to cover the cost of upgrading to the next version of a Microsoft product.

Microsoft already expanded its SA program to appease customers who complained the plan cost too much and offered too little. [See "Microsoft expands Software Assurance," May 27.] It may add more, should customers indeed be shying away from the plan, Connors said.

"If we have to add more benefits to the SA value program, we will do that," he said.

Microsoft's shares (MSFT) on the Nasdaq ended the regular day's trading up a fraction at US$28.91. In trading after hours the stock had dipped more than 4 percent, to US$27.61.

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