Microsoft balance sheet much awaited

Reed Stevenson

SEATTLE: Forget the nearly $10 billion in expected quarterly sales, it is the balance sheet investors will be watching closely when Microsoft Corp. reports earnings on Thursday.

The world's largest software maker is expected to book record sales during its fiscal second quarter ending in December, buoyed by rising personal computer sales and a rebound in business spending, analysts said on Wednesday.

But beyond that top-line figure, analysts will scan the results to see whether long-term software contracts are being renewed.

Investors and analysts are bracing for a dip in Microsoft's unearned revenue, which reflects corporate contracts for software that run over several years, and will want to see if new contracts make up for that decline.

Microsoft Chief Financial Office John Connors warned last quarter that unearned revenue was likely to decline by several hundred million dollars in the last three months of 2003.

Microsoft's balance sheet, which last quarter included $51.6 billion in cash, has loomed as large for investors as its income statement because of the way that it books long-term contracts for its Windows, Office, Server and other software used by businesses.

Three months ago, spooked investors sold Microsoft shares after it reported a decline in unearned revenue on the balance sheet that was twice as steep as expected. That was attributed in part to concerns about the security of Microsoft's software after the August 2003 attack by the Blaster worm and analysts want to see if these concerns have lingered.

For Microsoft's fiscal second quarter ended Dec. 31, analysts expect the Redmond, Washington-based software company to post an average profit of about $3 billion, or 30 cents per share, on $9.7 billion in revenue, according Reuters Research, a unit of Reuters Group Plc. The highest estimate for second quarter earnings is 40 cents per share, while the lowest is 29 cents.

Microsoft is projecting a profit of 86 cents to 88 cents per share for the full year to June on revenue of $34.8 billion to $35.3 billion. Analysts expect full year results at the upper end.

Given the high expectations, Microsoft could face some pressure if results fail to blow past the consensus, analysts said. But at the same time, Microsoft shares have not seen the same double-digit gains other technology shares have posted.

Microsoft, which was trading at $28.10 on Nasdaq on Wednesday, is up about 9 percent in the last year, while the S&P 500 Index has risen more than 24 percent.

Charles Di Bona, a software analyst at Sanford C. Bernstein & Co., said the real figure to watch would be the sum of unearned revenue plus off-balance sheet unearned revenue that will be booked but not yet treated as future income.

"Ignoring off-balance sheet levels will lead to underestimates of bookings," Di Bona wrote in a recent report.

In the fourth quarter of 2003, PC sales grew about 11 percent from a year earlier, according to estimates by market researchers Gartner Inc. and IDC, signaling a recovery in PC sales.

Also, analysts are looking for signs Microsoft can sustain nascent growth in its consumer businesses, most notably MSN, which posted its first operating profit in the September 2003 quarter. Microsoft wants to use its consumer business as a counterweight to cyclical business spending. It has also smoothed out income swings by encouraging business customers to pay for software under longer-term licensing contracts.

© Reuters