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Not your father's Microsoft
Strength in server business confirms the company's attempt to broaden its base.
October 21, 2004: 7:45 PM EDT
By Yuval Rosenberg, CNN/Money contributing writer

NEW YORK (CNN/Money) - Microsoft's quarterly results released Thursday make clear that the software maker is becoming a much different company than the one Bill Gates started back in 1975.

The biggest growth came from Microsoft's server software business, with a revenue jump of 19 percent. Overall sales grew 12 percent. (See more of the numbers here.)

"Microsoft is becoming more and more a server company and less and less a classic PC company," says Mark Stahlman, an analyst with Caris & Co.

Software products due out next year meant to work with new, faster chips will accelerate the transition. "It's only going to go more this direction," Stahlman says

Still, PC-related business is doing well too. Shipments were stronger than Microsoft had forecast. When it last reported earnings, Microsoft had offered a typically conservative estimate that global PC shipments would be up 6 percent to 8 percent this quarter.

Instead, Microsoft said shipments were up 10 percent and forecasted 8 percent to 10 percent growth for fiscal 2005.

"We've had a strong beginning to what we expect will be a very good year with continued growth in both our commercial and consumer businesses," said John Connors, chief financial officer at Microsoft. "This quarter we had a very healthy commercial server and desktop business driving double digit revenue growth."

"The concerns that everybody had over the summer that maybe growth was finished -- clearly that was wrong," said Stahlman.

Will customers re-up?

One potentially discouraging sign was that Microsoft's unearned revenue -- a measure of future sales from customers renewing software licenses -- came in weaker than the company had forecast.

Microsoft had predicted that its unearned revenue balance would drop by $200 million to $300 million this quarter as old licensing agreements expire. Some analysts expected the balance to fall significantly less, or even to grow slightly.

Instead, the unearned revenues balance dropped by $395 million.

"As the quarter unfolded it became clear to us that customers are taking a bit longer to renew," CFO John Connors said during a conference call with analysts.

Connors warned that analysts who focus on unearned revenue may miss the forest for the trees -- Microsoft maintained it full-year outlook for deferred revenue.

Still, some analysts may read that unearned revenue figure as a signal that the company's coming product release schedule isn't enticing enough to keep customers locked in to licensing agreements.

Microsoft's next generation of the Windows operating system, code-named Longhorn, is not due until 2006, and a big upgrade for its server software will likely come out in 2007.

If Microsoft isn't only about PCs anymore, it's also shifting beyond computers altogether. That move beyond the office or den and into the living room seems to be paying off, to some degree.

The MSN business reported another profitable quarter, with operating earnings of $77 million. MSN revenues grew to $540 million from $491 million a year ago.

The Xbox business showed gains too. Revenue grew 9 percent and the operating loss shrank by 47 percent compared with last year

Microsoft announced earlier this week that pre-orders of the highly anticipated videogame Halo 2, published by Microsoft Game Studios exclusively for the Xbox, have topped 1.5 million. That could be a sign that the company's Home and Entertainment division is in store for a very happy holiday season.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.