Microsoft sees uptick in Q4 revenue

Microsoft Corp. Thursday said fourth-quarter sales grew from a year ago thanks to increased sales of its Windows and Office software products, but the company wrote off loses due to sour investments, which cut into profits.

For its fiscal fourth quarter ended June 30, Microsoft reported revenue of US$7.25 billion, a 10 percent increase over reported revenue of $6.58 billion for the fourth quarter of fiscal 2001, the company said in a statement.

Net income was $1.53 billion, or $0.28 diluted earnings per share, after accounting for an $806 million charge from investment losses that hacked $0.15 from the company's earnings per share. For the same quarter in 2001, net income totaled $65 million, or $0.01 per share. Those figures were reduced by a $2.63 billion investment charge that cut $0.47 per share from its earnings, Microsoft said.

Financial analysts had expected Microsoft to earn $0.42 per share on revenue of $7.08 billion for the quarter, according to an estimate compiled by Thomson Financial/First Call. That estimate didn't take into account charges for investment write-downs.

Microsoft in April offered guidance that it would report revenue in the range of $7 billion to $7.1 billion for the quarter, with diluted earnings per share of $0.41 or $0.42.

"The biggest disappointment was charges we took from investments," John Connors, Microsoft's chief financial officer, said in a conference call Thursday with reporters and analysts. "Just like spending on research and development, some of these investments will pay off, some won't."

In the past two years, Microsoft has been forced to write down $9 billion from investments gone bad, largely in cable and telecommunication companies, he said.

Revenue from the sale of desktop software came in at $4.97 billion, compared to $4.55 billion in the fourth quarter of 2001. That gain was driven by increased sales of both its Windows operating system and Office software, the company said.

Analysts had been expecting Microsoft to report increased sales of both desktop software and operating system licenses due to a change in policy being introduced. Microsoft set a deadline of July 31 for customers to switch to its new License 6.0 bulk licensing plan and still receive discounts for the move. Customers who do not switch to the new plan by the deadline date will have to pay the full price of their next Windows and Office upgrades, rather than receiving discounted upgrade prices.

The new license programs also require customers to pay a subscription fee for the life of a software contract, called an annuity license.

"We saw many corporate customers take advantage of our annuity licensing programs," said Scott Boggs, Microsoft's corporate controller, confirming that the new bulk licensing program helped drive sales.

Much of the revenue that comes from those subscription license agreements is accounted for as unearned revenue, which is recognized in later quarters. At the end of the fourth quarter, Microsoft had $7.7 billion in unearned revenue on its books. About $6 billion of that will be recognized during fiscal year 2003, Boggs said.

Sales of its enterprise servers and services in the fourth quarter increased 4 percent from a year ago, to $1.35 billion, Microsoft said. The company highlighted database software as a particularly strong growth area.

"During a time when the overall database market is flat, SQL Server had another great quarter with over 20 percent revenue growth year over year," the company said in a separate statement.

Microsoft sold 3.9 million of its Xbox video game consoles during the quarter, lower than the expectations it outlined at the beginning of the year. Revenue from its MSN properties, which include Microsoft's Internet access service, Web portal and other online properties, was up 24 percent, Connors said.

Revenue from software sold through original equipment manufacturers grew 17 percent over the fourth quarter 2001, primarily due to sales of Windows XP, he said.

For the full fiscal year 2002, Microsoft reported revenue of $28.37 billion, a 12 percent increase over $25.30 billion reported for fiscal 2001. Net income for the year was $7.83 billion, or $1.41 per share, up from $7.35 billion, or $1.32 per share in the fiscal year 2001.

The 2001 earnings figure included after-tax charges for investment losses that reduced the total by $0.53 per share. Additionally, Microsoft recorded an estimated expense of $0.08 in connection with consumer class action lawsuits recorded in the December 2001 quarter, and a one-time gain of $0.15 per share on the sale of Expedia recorded in the March 2002 quarter, the company said.

Looking ahead, revenue is expected to be in the range of $7.0 billion and $7.1 billion for the fiscal first quarter 2003. Diluted earnings per share is expected to be about $0.42 or $0.43, Microsoft said.

For the full fiscal year 2003 revenue is expected to equal about $32.4 billion, and diluted earnings per share should be in the range of $1.85 to $1.91, according to Microsoft.

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