Microsoft posts higher earnings, splits stock

Microsoft Corp. said revenue increased 10 percent in its second fiscal quarter to US$8.54 billion, a fraction less than analysts had been expecting but still higher than any quarter in its history. It also announced a two-for-one stock split and an annual dividend for its shareholders.

Net income came in at US$2.55 billion for the period ending Dec. 31, including a US$282 million charge for investment impairments and a US$126 million credit related to a favorable tax court ruling, the company said. That was up from net income of US$2.28 billion in the prior year's second quarter, Microsoft said in a statement Thursday.

The company characterized its results as "solid" in every business, but also warned that it doesn't expect global IT spending to pick up any time soon.

"We're pleased to deliver solid results in a challenging global economic environment," Microsoft Chief Financial Officer John Connors said in a conference call. "Corporate IT spending continues to be tepid, but we were delighted to see our server platforms doing well despite that weakness."

Revenue from its server group increased 12 percent from a year earlier to US$1.76 billion, including 40 percent growth for Microsoft's SQL Server 2000 database, the company said. Revenue also climbed from its Home and Entertainment division, which makes the Xbox gaming console, and its Knowledge Worker group, which makes applications including Microsoft Office. MSN also had a strong quarter, with online advertising up 40 percent, Microsoft said.

In fact, the only one of Microsoft's seven business divisions to see declining revenue was its client group, the largest producer of revenue, which reported US$2.54 billion in sales, down from US$2.56 billion a year earlier. The group makes its desktop Windows operating systems.

"Our view continues to be that there has not been much change in the health of the PC ecosystem and that things are pretty soft," Connors said, adding that the company expects PC shipments to grow in the low single digits for the full year -- lower than some industry analysts have predicted.

Microsoft has sold 8 million Xbox consoles worldwide, with more than half the sales in North America. It expects to have sold a little over 9 million Xboxes by the end of the fiscal year in June, Connors said. About 250,000 customers have signed up for Xbox Live, its online gaming service, since it debuted in November, the company said.

Microsoft's revenue continued to benefit from Licensing 6, an annuity program in which customers pay for their software over the course of two-to-three-year contracts. Microsoft initially books the payments as unearned revenue and then realizes the money over the life of the contracts. It accounted for about 22 percent of its second-quarter revenue, Connors said.

Operating income came in at US$3.26 billion including a charge of US$210 million, which is what Microsoft estimates it will cost to cover state antitrust and unfair competition lawsuits.

Diluted earnings per share increased to US$0.47, including a US$0.03 charge related to Microsoft's estimate of the cost of class action lawsuits, a US$0.05 charge for investment impairments, and a one-time benefit of US$0.02 for the tax court ruling noted above. That compared to diluted earnings per share of US$0.41 a year earlier, which included an US$0.08 charge related to estimated class action lawsuit costs, Microsoft said.

The revenue figure of US$8.54 billion compared with US$7.74 billion in the same quarter a year earlier, the company said. Analysts had been expecting revenue of US$8.59 billion, according to a poll by First Call/ Thomson Financial.

Microsoft also announced an annual dividend for shareholders and said its board has approved a two-for-one stock split. The dividend of US$0.16 per share (pre-split) is payable March 7 to shareholders of record on Feb. 21. As a result of the split, shareholders will receive an additional share for each share they hold on Jan. 27, the company said.

Declaring a dividend shows the board's confidence in Microsoft's long-term growth opportunities and financial strength, Connors said in the statement. At the same time, he acknowledged several risk factors that investors should be aware of, including the threat posed by the Linux operating system.

"Linux continues to be a threat to our server business. The ramifications of free software to our business model should be obvious to everybody," he said.

The company ended the quarter with cash and short-term investments totalling US$43.4 billion, up from US$38.7 billion at the end of the June quarter six months earlier.

Ahead of the earnings release, Microsoft's (MSFT) shares on the Nasdaq closed at US$55.46, down US$0.81 on the day, or 1.44 percent.

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