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Microsoft beats the Street
World's No. 1 software firm reports stronger-than-expected profit, but stock sinks after hours.
October 23, 2003: 6:41 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Microsoft Thursday reported that earnings jumped 28 percent for the latest quarter, thanks to stronger-than-expected sales of software for personal computers, but that big businesses were still slow to boost tech spending.

The world's No. 1 software company reported net income of $2.6 billion, or 24 cents a share, for its first quarter ended Sept. 30, up from $2 billion, or 19 cents a share, a year earlier.

Microsoft said in July that its new restricted stock compensation program would result in a 6-cent-a-share hit to earnings in each quarter. Without that cost, earnings would have come in at 30 cents a share for the first quarter. That would be a penny a share higher than what analysts were expecting, according to First Call.

Sales came in at $8.2 billion, up 6 percent from a year ago and ahead of the consensus estimate of $8.1 billion.

Microsoft (MSFT: Research, Estimates) stock sank more than 4 percent in after-hours trading, according to Island ECN, after ending little changed during regular trading.

Guidance good but not great

Microsoft gave guidance for its fiscal second quarter that was well ahead of analysts' estimates but did not boost guidance for the full year by that much.

The company said it expected sales for the second quarter to be in a range of $9.7 billion and $9.8 billion and that earnings, excluding the 6-cents-per-share compensation charge, to be between 29 cents and 30 cents. Wall Street was expecting sales of $9.3 billion and earnings of 28 cents per share.

For the full fiscal year, Microsoft said that sales should be between $34.8 billion and $35.3 billion with earnings of about $1.10 to $1.12 per share, excluding compensation expenses. Analysts are forecasting revenue of $34.7 billion and earnings per share of $1.11.

Microsoft Corporation

Considering that semiconductor market leader Intel (INTC: Research, Estimates) reported a strong third quarter a few weeks ago, thanks to robust sales of PCs, and gave an indication that the fourth quarter would be very strong as well, investors might have been disappointed that Microsoft wasn't as bullish.

"People were hoping for just a little bit better on the guidance," said Alan Davis, an analyst with McAdams Wright Ragen in Seattle. "Guidance was OK but not great."

Another cause for concern was that Microsoft's unearned revenue, which is a measure of sales that the company expects in coming quarters from software license renewals, slipped sharply from $9 billion at of the end of June to $8.2 billion at of the end of September.

Richard Williams, strategist for Summit Analytic Partners, an independent research firm focusing on software, said that Microsoft's failure to substantially lift the full-year numbers is a sign that the jury is still out on whether or not the recent strength for PC-related companies is really proof of a full-blown tech recovery.

"At the very best, this hints at a muted recovery, and that's a long way from what tech bulls are expecting. The numbers have to go beyond seasonal strength," said Williams.

Consumer is still king

Along those lines, Microsoft said that consumer spending on tech continued to be strong but that business spending is still sluggish. "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," John Connors, Microsoft's CFO, said in a written statement.

During a conference call with analysts, Connors added that the company now expects to see higher PC shipment growth than it was expecting in July, with a forecast of PC growth in the high single digits during its fiscal year, up from its prior outlook of 4 percent to 6 percent growth.

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Also during the call, Microsoft corporate controller Scott Di Valerio said that the company was helped by its MSN Internet service, which reported an operating profit, and its Xbox game console business. MSN and the home entertainment business make up approximately 13 percent of Microsoft's overall revenue.

Still, Microsoft did see some health in the corporate market, with sales of software for servers increasing 15 percent from a year ago, coming in at $1.9 billion. Server software revenue now accounts for nearly a quarter of Microsoft's total sales.

Microsoft stresses security as a priority

Microsoft released its latest version of its flagship Office suite of software this week and hopes are high for the newest version of its Windows operating system, dubbed Longhorn, due out next year.

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But its stock has been in a bit of a holding pattern this year, trailing the meteoric returns of many other large tech companies, such as Intel and Cisco Systems (CSCO: Research, Estimates). Microsoft has had to battle a fair share of negative publicity this summer due to a series of worms and viruses that targeted users of computers running on Windows.

In the earnings release, Connors said that "executing on our plan to better help protect customers from a growing number of security attacks" was one of the company's top priorities for the remainder of the year. Connors reiterated this during the call, adding that security was actually the number-one priority of the company.

Microsoft's widely scrutinized cash figure increased again as well, from $49 billion at the end of June to $51.6 billion as of the end of September.

The company has been criticized by some on Wall Street for not putting more of its cash to use. Microsoft did begin paying a dividend in March, and doubled it last month, but the yield is still just 0.6 percent.

Analysts quoted in this story do not own Microsoft shares and their firms have no investment banking relationships with the company.  Top of page

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