Investment loss cuts Microsoft earnings in half

The slowdown in the U.S. economy indirectly took its toll on software giant Microsoft, which reported Thursday a 6 percent growth in revenue over the same quarter last year, but saw investment losses drag down earnings.

The Redmond, Washington software maker reported earnings on an adjusted basis of US$0.23 per share, or $1.28 billion, for the fiscal first quarter of 2002 ended Sept. 30. Revenue as expected came in at $6.13 billion. Microsoft earned $0.46 per share on revenue of $5.8 billion, in the same quarter last year.

A consensus of 27 analysts polled by Thomson Financial/First Call expected Microsoft to report earnings of $0.39 per share on revenue of $6.16 billion.

The discrepancy between Microsoft's results and those expected by analysts had to do with a $1.24 billion after-tax charge Microsoft took during the quarter due largely to $980 million in losses from investments in the cable and telecommunications industries. That investment loss erased $0.20 per share from the company's earnings.

Operating income totaled $2.90 billion compared to $2.78 billion in the prior year, Microsoft said.

Analysts had lowered their estimates in July, from $0.45 per share on expected revenue of $6.3 billion, when Microsoft updated its first-quarter forecast during its year-end earnings report. Anticipating the continued slowdown in PC sales, the software maker predicted revenue to be between $6 billion and $6.2 billion, and earnings of $0.39 per share.

In anticipation of Microsoft's earnings release, shares of the company's stock gained $0.72, or 1.29 percent, to close at $56.75 Thursday.

Analysts now expect to get some sense on how the company plans to do in the current quarter, specifically regarding its view of the PC market as consumer confidence wanes and the aftermath of the Sept. 11 attacks sets in.

"Guidance on PC growth will be important," said John Puricelli, an analyst with A.G. Edwards & Sons Inc., in an interview before the company's results came out. "The real key will be what Microsoft's forward-looking estimates are."

The company didn't immediately offer guidance on expected PC sales on its fiscal second quarter, which will include the always-important holiday shopping season, when the PC industry typically has its healthiest quarter.

In the market for its .Net servers, which accounted for about 20 percent of Microsoft's revenue, Microsoft said growth continued, as it had expected it to. However sales of its enterprise products are somewhat secondary, Puricelli said.

"(Servers) are not something to ignore, but right now it's certainly about desktop software," Puricelli said.

Looking ahead, Microsoft noted Thursday that it expects its current quarter to see gains from the introduction of its new Windows XP operating system, the Xbox video game console, and its new MSN 7 Web software and services. The uncertain consumer market will have an effect on those sales, Microsoft said.

In that quarter, Microsoft said revenue is expected to be between $7.1 billion and $7.3 billion, with adjusted earnings per share of $0.49 or $0.50.

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