Win2K sales carry Microsoft through tough quarter

Continued growth in sales of the Windows 2000 operating system carried Microsoft through the dismal economic quarter, meeting Wall Street expectations, but the company said Thursday it expected fiscal first quarter 2002 to fall short of earlier estimates.

Microsoft reported revenue of US$6.58 billion for the quarter ended June 30. That's a 13 percent increase over the $5.80 billion for the same quarter last year when the company earned $0.42 per share. Full year diluted earnings per share reached $1.32 on $25.3 billion in revenue for 2001, compared to earnings per share of $1.70 on revenue of $22.96 billion a year ago.

A consensus of 24 analysts polled by Thomson Financial/First Call expected Microsoft to earn $0.43 per share on revenue of $6.5 billion in the fourth quarter.

Looking ahead, Microsoft said it expects its fiscal first quarter 2002 revenue to be in the range of $6 billion and $6.2 billion, earning about $0.39 per share. That falls short of the $0.45 per share on $6.3 billion revenue target analysts expected.

The anticipated release of its Windows XP operating system and XBox video game console won't show up in Microsoft's quarterly results until the fiscal second quarter of 2002.

The company will take a charge of $2.6 billion to cover its money-losing investment portfolio, mainly due to the waning telecommunication industry, Microsoft said last week. Microsoft actually lost $3.9 billion on investments in the sector, but gained $1.3 billion in other investments, cutting its losses by a third. That loss was reflected in a $0.01 per share reduction for the fourth quarter.

Microsoft also revised its revenue expectations for the quarter upward at the time. The company told investors to expect between $6.5 billion and $6.6 billion in revenue, up from a previously expected $6.3 billion to $6.5 billion. The upward revision flew in the face of other industry players that have given financial warnings this quarter due to a slump in PC sales.

Carrying Microsoft through the doldrums were strong sales of its Windows family of products, the company said. Licensing revenue alone for the desktop operating system accounted for more than $2 billion for the quarter.

Sales of Windows 2000 Professional accounted for 41 percent of all 32-bit Windows operating systems shipped during the quarter, up from 35 percent in the March 2001 quarter.

Aside from pitching its sales and services, Microsoft has spent much of the quarter skirting antitrust issues.

Wednesday, the software maker petitioned the U.S. Court of Appeals for the District of Columbia to reconsider the issue of whether the "commingling" of its Internet Explorer (IE) browser with software code in the Windows 98 operating system violated federal antitrust law.

The Appeals Court last month upheld District Court ruling that Microsoft has illegally used its operating system monopoly to squelch competitors. However, the appellate court found that District Court Judge Thomas Penfield Jackson had behaved inappropriately in making public comments and in granting interviews to reporters when he still was overseeing the case and before he had issued the remedies to be imposed on Microsoft. The appellate court also tossed out Jackson's order that Microsoft be split into two separate companies -- one focused on operating systems and the other on applications.

The remedies issue is to be reconsidered by a different District Court judge. The Appeals Court also sent the issue of "tying" Windows to IE back to the lower court for reconsideration, offering guidance to the trial judge as to what should be considered in that matter and what each side must prove. The court further found that the government did not prove its claim that Microsoft attempted to create a monopoly in Web browsers.

Microsoft has since argued that "critical evidence was overlooked -- or misinterpreted -- on the technical question of whether Microsoft 'commingled' software code specific to Web browsing with software code used for other purposes in certain files in Windows 98," the company said in a court document.

Last week, the U.S. Department of Justice (DOJ) petitioned the Appeals Court to speed the case to a trial level. The DOJ and 19 state attorneys general were the original plaintiffs in the case, filed more than three years ago. The attorney general of New Mexico recently settled with Microsoft.

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Matt Berger

Computerworld
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