October 23, 2003 4:30 PM PDT

PC sales bolster Microsoft profits

Amid stronger-than-expected consumer PC sales, Microsoft on Thursday reported earnings that narrowly topped expectations. Its sales rose 6 percent from a year ago.

The Redmond, Wash.-based company said it earned $2.6 billion, or 24 cents per share, on revenue of $8.2 billion for the three months ended Sept. 30. That compares with earnings of $2 billion, or 19 cents per share, on revenue of $7.75 billion for the same quarter a year ago.

The first-quarter figures include 6 cents per share in charges that are related to the company's decision to expense the cost of granting stock options to employees, while the year-ago figures include 3 cents per share in asset-impairment charges and 6 cents per share in stock-compensation charges.

Overall, the software maker's results were slightly better than the company's predictions and analysts' expectations.

Microsoft said in July that it expected revenue between $7.9 billion and $8.1 billion, with earnings of about 23 cents per share. Analysts were expecting a result in line with that guidance, according to First Call consensus estimates.

"While corporate IT spending was slow to improve this quarter, we saw strength across all of our consumer businesses, driving higher-than-expected revenue for the company," Microsoft Chief Financial Officer John Connors said in a statement.

Although Microsoft's reported numbers were better than expected, the company posted a sharper-than-expected decline in unearned revenue--that is, money taken in by Microsoft but not booked as sales for that quarter. Executives said concerns over security issues prompted some customers to be hesitant to sign longer-term deals.

"Security concerns after a few high-profile attacks...diverted the focus of our customers, our sales force and the channel," Connors said on a conference call with analysts.

All seven of Microsoft's business units posted a year-over-year rise in sales. The client unit, which includes the desktop versions of Windows, posted revenue of $2.8 billion, roughly flat from a year earlier. The company's Server and Tools business, which includes the Windows Server 2003 operating system, saw revenue rise to $1.87 billion from $1.62 billion a year earlier. The Information Worker business, which includes Office, saw sales climb to $2.29 billion from $2.27 billion a year earlier.

Microsoft Business Solutions, which includes Microsoft's business application software, saw sales increase to $128 million from $106 million a year ago. MSN posted its first profitable quarter on revenue of $491 million in sales, up from $427 million. The company said a better-than-expected rise in advertising helped offset a decline in Internet access subscribers. Finally, the Home and Entertainment unit recorded $581 million in revenue, up from $485 million a year earlier, while the Mobile and Embedded Devices unit saw sales rise to $53 million from $28 million a year ago.

For the current quarter, Microsoft forecast per-share earnings of 23 cents or 24 cents, on revenue in the range of $9.7 billion to $9.8 billion. The earnings forecast includes stock compensation charges projected at 6 cents per share. For the full year ending June 30, Microsoft sees per-share earnings of between 86 cents and 88 cents--including 24 cents per share in stock compensation charges--on revenue in the range of $34.8 billion to $35.3 billion.

That's an increase from the company's July forecast of revenue between $34.2 billion and $34.9 billion and an earlier forecast of between $33.1 billion and $33.8 billion.

Microsoft attributed some of its optimism to an increased forecast for PC unit sales, which are expected to rise in the high single digits on a percentage basis. The company said it sees the consumer market growing faster than the corporate market, though both are expected to do better than it had forecast in July. Server sales are also expected to rise about 1 percentage point faster than the software maker projected in July, though Connors noted that "corporate IT spending has been slower to recover."

The company said it is not predicting an overall improvement in the economy, but it is predicting some increase in corporate technology in the second half of its fiscal year--the first half of 2004.

Connors said Microsoft faces a number of risks, including threats by Linux, the possibility corporate spending won't pick up, as well as increased security concerns, which he said is the company's top focus. "That could result in additional time being required to close deals," he said.

The earnings report comes ahead of the company's major developer conference, which takes place next week in Los Angeles. There, the company is expected to offer more details on Longhorn, the next version of Windows, as well as on other future software efforts.

 

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