Microsoft revenue up, profit shrinks on charge

Strong sales of its Windows XP operating system and its Xbox video game console boosted revenue for software giant Microsoft Corp., but couldn't help its earnings as the company reported Thursday a 12 percent drop in net income for the second quarter over the same quarter last year.

The Redmond, Washington, software maker reported US$0.41 earnings per share for the second fiscal quarter of 2002 ended Dec. 31. Excluding a one-time $660 million charge related to estimated expenses in connection with consumer class action lawsuits, Microsoft earned $0.49 per share. That beat a consensus expectation of $0.43 per share from analysts polled by Thomson Financial/First Call, which didn't take into account the one-time charge, according to a Thomson Financial/First Call official.

Net income for the quarter, including the one-time charge, was $2.28 billion, compared to $2.62 billion in the second quarter last year. Revenue came in at $7.74 billion, an 18 percent increase over the same quarter last year. Thomson Financial/First Call was expecting Microsoft to rake in revenue of $7.27 billion.

Microsoft earned $0.47 per share on revenue of $6.6 billion in the second quarter 2001.

Based on guidance offered by Microsoft when it released first quarter earnings in October, the company expected revenue to be between $7.1 billion and $7.3 billion, with adjusted earnings per share of $0.49 or $0.50.

Operating income totaled $2.84 billion compared to $3.2 billion in the same quarter of the prior year, Microsoft said.

In anticipation of Microsoft's earnings release, shares of the company's stock (MSFT) gained $1.98, or 2.92 percent, to close at $69.85 Thursday.

Microsoft Chief Financial Officer John Connors said during a conference call following the company's first quarter earnings release in October that it expected to sell 1 million to 1.5 million Xbox consoles during the quarter, following the November launch. It hit the high end of that estimate, the company said in a statement.

By the end of the fiscal year, as many as 6 million units will have been sold worldwide, he said at the time. Connors reiterated that target in a conference call Thursday following the earnings release.

Windows XP was also expected to show healthy adoption during the quarter, he predicted at the time. Since the launch of Windows XP on Oct. 25, more than 17 million copies have been sold by computer manufacturers on new personal computers and by retailers, Microsoft said Thursday.

"It was the most successful launch of an operating system in our history," Scott Boggs, Microsoft corporate controller, said during Thursday's conference call.

Sales of the operating system by computer manufacturers were more than 300 percent higher than those of Windows 98 and 200 percent higher than those of Windows ME (Millennium Edition) over an equivalent period, the company said.

While its operating system sold well, desktop software revenue declined from $2.48 billion in the same quarter last year to $2.45 billion in the reported quarter, mainly due to slow sales of its Office XP software. Server platform software sales grew 2 percent and server application revenue grew 9 percent, Boggs said.

The company cited strong sales for its .Net enterprise servers, with new customers including Verizon Communications Inc., but most of the revenue from those sales will be deferred to future quarters, Microsoft said.

Looking ahead, Microsoft said revenue for the third quarter ending March 31 is expected to be in the range of $7.3 billion to $7.4 billion. Diluted earnings per share is expected to be $0.50 or $0.51. For the full year ending June 30, revenue is expected to be in the range of $28.8 billion to $29.1 billion, with diluted earnings per share of between $1.57 to $1.60.

Those results depend on IT spending to stay at current levels, the launch of the Xbox in Asia to go as expected, and PC shipments not to fall further than already accounted for. "We don't see a booming economy anytime soon," Connors said.

Total PC demand declined about 5 percent for the quarter, slightly worse than the company expected at the start of the period, Microsoft said. All major economies around the world reflected the weakening PC sales, and will continue to be weak in the coming two quarters, Connors predicted Thursday.

"We now believe (worldwide) PC shipments will continue to decline in at least mid-single digits," Boggs said.

One of the regions expected to be hardest hit is Japan. Sales of all of its products in the Asia region have already been declining, with revenue falling to $705 million in the second quarter from $737 million a year ago.

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Matt Berger

Computerworld
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