Microsoft net profit drops on legal charge

Scott Hillis

SEATTLE: Microsoft Corp. on Thursday posted a smaller quarterly net profit --

the result of legal expenses and a delay in the sale of its stake in online

travel firm Expedia Inc. -- but saw strong sales amid the launch of its new

Windows XP operating system and Xbox video game console.

For its second fiscal quarter ended Dec. 31, Microsoft posted a net profit of

$2.28 billion, or 41 cents a share, compared with $2.62 billion, or 47 cents a

share a year earlier.

Excluding the legal charge of $660 million, or 8 cents a share, Microsoft

would have seen a profit of $2.94 billion, or 49 cents a share. That figure

topped analyst expectations, which were for a penny or two above the company's

official guidance of a profit of 41 or 42 cents a share.

Wall Street tracking firm Thomson Financial/First Call had a consensus

estimate of 43 cents a share, but many analysts considered the number unreliable

because some analysts polled by First Call had not updated their figures to

account for the Expedia delay.

Revenues were $7.78 billion, up 18 per cent from $6.5 billion a year earlier,

and surpassing the company's official guidance of $7.1 billion to $7.3 billion.

"Our results were really quite strong with Windows XP and Xbox. Both have

performed tremendously well," chief financial officer John Connors said.

Although Microsoft's proposed consumer class action settlement to supply

schools with $1 billion of software and services was rejected by a federal

judge, Connors said accounting rules required the company to include the effects

of its proposal.

Conservative forecast



Microsoft also forecast operating income for its current, third quarter would
rise slightly but said sales would slip amid the tough economy.

For the third quarter, Microsoft gave guidance for an operating profit of

$2.8 billion to $2.9 billion, or 50 to 51 cents a share, on revenues of $7.3

billion to $7.4 billion. "While we are pleased with our results this

quarter, we are concerned about the health of the global economy and have yet to

see a recovery in many of the world's largest markets," Connors said,

singling out Japan as a particular area of worry.

Some initial reaction to the results was negative, partly as analysts tried

to untangle the unusual charges and figures in the report. "They are a

little disappointing. The revenues were surprisingly strong but it's surprising

that there was such a disparity between them and the income figure,"

Pacific Crest analyst Brendan Barnicle said.

Microsoft shares fell about two per cent in after-hours trading to $68.35,

after rising three per cent to $69.86 in regular Nasdaq trade. Other analysts

said that once the legal charge was accounted for, the quarter looked fairly

strong, though not in ways widely expected.

"It's really weird. The quarter looked to be a huge quarter. They blew

away the revenue number but the mix is a little weird. Enterprise slowed and

Windows picked up which is kind of weird," said Scott McAdams of brokerage

McAdams Wright Ragen.

Windows delivers, enterprise soft



Desktop platforms -- basically the company's Windows personal computer
operating system -- saw sales rise 24 per cent to $2.5 billion as a

better-than-expected year-end PC market gave a boost to Windows XP, which

launched last October.

Windows XP, which had sold 17 million copies through PC makers and retail

outlets since it launched last October. Sales of desktop applications --

Microsoft's largest unit that includes the Office suite of productivity software

-- fell 1.4 per cent to $2.45 billion.

The hottest area of growth was in the consumer division, which saw sales more

than double to $1.2 billion from $506 million a year earlier due to the Xbox

video game console and an update to the MSN Internet access service and Web

sites.

However, Microsoft's enterprise segment, which covers software like its SQL

database and Exchange e-mail server aimed at corporate networks, grew only four

per cent to $1.3 billion, much slower than the double-digit growth many analysts

had expected.

"The results in the enterprise segment represented some challenges we

were seeing as a result of a weaker-than-expected economy that we don't see

recovering quickly," Connors said. Microsoft's income figures also include

investment gains or losses, and for the quarter just ended the company saw such

gains total $553 million, down from the $751 million it saw a year earlier.

Microsoft said last month its $650 million deal to sell its Expedia stake to

USA Networks Inc. -- which would have added 8 cents a share to earnings -- would

be put off until later this year pending USA's agreement to be acquired by

Vivendi Universal.

(C) Reuters Limited.