Microsoft profits, revenues top estimates

By Scott Hillis

SEATTLE: Microsoft Corp. on Thursday posted third quarter profits and revenues that topped Wall Street estimates as the software giant bucked a wider technology slump with strong sales of its Windows 2000 Operating System and other corporate software.

Microsoft, the world's biggest software firm, said that for its third fiscal quarter ended March 31 its net profit inched up 2.5 per cent, to $2.45 billion, or 44 cents a share, from $2.39 billion, or 43 cents a share, a year earlier. That beat analyst’s expectations that ranged from 40 cents to 43 cents a share, according to Wall Street tracking firm Thomson Financial/First Call. The consensus estimate was 42 cents a share.

"Despite difficult market conditions they are continuing to do well. The initial reaction is very encouraging, I think the stock will do well " said Pacific Crest analyst Brendan Barnicle.

XBox, PCs cause for caution

Despite, the surprisingly good results, the firm issued cautious guidance for the months ahead saying that fourth quarter performance would be similar to the third quarter, with revenues of $6.30 billion to $6.50 billion. Earnings per share would be 41 or 42 cents, including a 1cent per-share charge related to Microsoft's $1.1 billion purchase of software maker Great Plains.

Fiscal 2002 revenues would be $28 billion to $29 billion while earnings per share would be between $1.90 to $1.94. "It's not super growth, it's higher single digit growth. I think they're taking their historically cautious stance in front of major product upgrade cycles," said Jonathan Geurkink, analyst with Wells Fargo Van Kasper.

Microsoft is due to launch the next version of Office, called Office XP, on May 31 and the next version of Windows, Windows XP in the second half of the year. Chief Financial Officer John Connors told analysts on a conference call that some caution was due to the slumping PC market. Connors said PC shipment growth this year would be in the mid-single digits, a few percentage points lower than his January estimate that put growth at ‘10 per cent at best’

The financial forecasts also take into account the launch later this year of the Xbox, Microsoft's anticipated video game console that will compete with Sony Corp.'s PlayStation 2. Console makers usually lose money on the hardware as they try to quickly build an installed base of customers who then buy lots of games, which is where the profits are made.

But it could take years for Microsoft to recoup initial losses, and Connors said the Xbox launch would pull down gross margins, although it would eventually contribute to absolute operating income and profit growth.

Windows 2000 kicks in

The third quarter results were powered by Windows 2000 sales, which have finally built steam as corporations have commenced deploying the platform after more than a year of evaluation, Connors told Reuters in an interview. "We tried to caution last spring that it was a business operating system, and that the evaluation, architecture and deployment cycle was quite different from a consumer operating system release," Connors said.

"The net result is now we're seeing deployments that were planned happen, and positive feedback has helped accounts with new business," Connors said. Microsoft said revenues in its desktop platforms business, which includes Windows 2000 and the consumer-oriented Windows Me, rose 16.3 per cent to $2.05 billion.

The results were also bolstered by corporate products, which are relatively new market for Microsoft. It said sales of enterprise software like the SQL database and Exchange e-mail server rose 22 percent to $1.25 billion. For the fourth quarter, Windows 2000 was expected to drive platform growth in the low double digits, while enterprise revenues would climb in the low teens, Connors said.

There was also good news from the desktop applications unit, which is home to Microsoft's other big cash cow, the Office suite of productivity software. Applications sales rose 6.6 per cent to $2.41 billion, reversing a trend from previous quarters in which year-over-year revenues declined. Connors attributed this to more businesses signing up for long-term Office licenses.

"A significant number of organization licenses are multi-year and companies are looking at next releases of Office and Windows," Connors said. Applications revenues in the fourth quarter would be a ‘little higher’ than the third quarter, helped by the Great Plains line-up of small and medium-sized business software, Connors added.

The performance in both platforms and applications clearly impressed many analysts who had expected Microsoft to follow in the steps of other tech companies and miss targets. "Really it was across the board. A lot of the growth was in the US, when for so many other companies it was a black hole for IT spending," Geurkink said.

Investments soft

On the small but fast-growing consumer business that includes the MSN Internet access and portal service, revenues rose 21.7 per cent to $460 million, though Connors said the online advertising slowdown had dampened results. "The advertising market came in where we thought, softer than the first half, but all in all, we are pleased with the growth in MSN," Connors said, noting that there were now 5 million MSN Internet access subscribers and 100 million users of Micrsoft's free Hotmail e-mail service.

Microsoft's huge stash of cash and short-term investments swelled further to $30 billion from $26.9 billion at the end of its second fiscal quarter.

(C) Reuters Limited 2001.