Microsoft Q1 net touches $2.9 b

Reed Stevenson

SEATTLE: Microsoft Corp. has posted higher quarterly earnings as its revenue rose 12 percent, but its shares fell after the world's largest software market said current quarter sales would fall below Wall Street expectations.

Net profit rose to $2.9 billion, (including stock-based compensation) for Microsoft's first fiscal quarter ended Sept. 30, from a profit of $2.6 billion, a year earlier. Revenue rose to $9.19 billion from $8.22 billion.

For the current quarter, Redmond - Washington based Microsoft forecasts a profit of 28 cents per share, including stock-based compensation. The company said it expected to record a revenue of $10.3 billion to $10.5 billion, short of the average Wall Street estimate of $10.63 billion.

Shares in Microsoft, which have been flat over the past year, sold off after the earnings announcement. The stock was down 2 percent at $28.00 in after-hours trade on INET, after closing down 14 cents at $28.56 on Nasdaq.

Excluding stock-based compensation, Microsoft had a profit of 32 cents per share in the first fiscal quarter, well above the average analyst forecast of 30 cents, after accounting for about 5 cents per share in stock-based compensation costs, several analysts said.

"The stock traded down a little bit because people don't realize you have to add back in 5 cents (for the stock compensation)," said analyst Brendan Barnicle of Pacific Crest Securities.

Microsoft Chief Financial Officer John Connors said the company would no longer break out stock-based compensation since it had accounted for that expense for all its previous fiscal year, making it easier to compare year-on-year net numbers. "We want to get folks looking at our GAAP results," Connors said, referring to Generally Accepted Accounting Principles.

The practice of awarding employees with stock rather than options, the settlement of major legal disputes, a plan to return cash to shareholders and long-term contracts for major customers all point toward Microsoft facing a period of more modest but steady growth, analysts said.

"I think we'll see less volatility," Connors added.

Indeed, for its current fiscal year to June 2005, Microsoft said it expects to post a profit of $1.07 to $1.09 per share on revenue of $38.9 billion to $39.2 billion. Analysts' full-year revenue estimate, on average, was for $38.92 billion. "The full-year guidance looks good on both earnings per share and revenue, It's at least in line with where the Street is." said Barnicle.

Microsoft's projected yearly growth rate for fiscal 2005 is 5.6 to 6.4 percent, its slowest sales growth since going public in 1986. Microsoft has always issued conservative guidance, only to surprise on the upside, said Charles Di Bona, analyst at Sanford C. Bernstein & Co. "This is a solid growth company," Di Bona added.

For the second fiscal quarter, Microsoft forecast revenue of $10.3 billion to $10.5 billion. Analysts, on average, have forecast second-quarter revenue of $10.63 billion.

Microsoft's projection of 8 to 10 percent growth in PC shipments in the current fiscal year is also more conservative compared with industry estimates. Research firm IDC is expecting PC shipments of at least 14.2 percent for 2004.

A good chunk of Microsoft's growth is expected to come from sales of its Windows Server software for computer networks, which is competing against the Linux operating system. Business are turning to cheaper PC-based servers to run their networks. "The server business is just darn healthy worldwide right now," Connors told analysts on a conference call. In fact, the server business posted the highest growth among Microsoft's top three Windows, Server and Office divisions with revenue rising 19 percent to $2.23 billion.

The division for Windows desktop software grew 6.5 percent to $2.99 billion and the Office division grew 13.6 percent to $2.56 billion.

(Additional reporting by Duncan Martell in San Francisco)