Consumer sales push Microsoft results up

Microsoft Corp. on Thursday reported an increase in earnings and revenue for its first fiscal quarter, citing strong demand from consumers which helped offset a slow recovery in corporate IT spending.

The Redmond, Washington, software vendor also slightly upped its revenue and earnings estimates for its full 2004 fiscal year, which ends in June 2004.

Net income for the quarter ending Sept. 30 came to $2.61 billion, or $0.24 a share, which includes equity compensation expenses of $680 million, or $0.06 a share. For the same quarter a year earlier, Microsoft reported net income of $2.04 billion, or $0.19 a share, including charges of $993 million or $0.09 a share, the company said in a statement.

The earnings beat analysts’ expectations by a penny. Excluding the compensation expenses Microsoft earned $0.30 a share for the quarter. Analysts polled by Thomson Financial had been expecting $0.29 a share, in line with Microsoft’s earnings guidance given in July.

Revenue amounted to $8.22 billion, up 6 percent year-on-year from $7.75 billion, beating the analyst consensus estimate of $8.08 billion. Microsoft’s own revenue guidance was for between $7.9 billion and $8.1 billion.

Microsoft profited from double-digit growth in PC shipments in the past quarter. In July the company predicted only mid-single digit growth in PC shipments for its full 2004 fiscal year.

“PC demand for the first quarter was much better than we had forecasted across all geographies, but particularly in Japan, the U.S. and Europe,” said John Connors, chief financial officer at Microsoft, in a conference call.

“Even though corporate IT spending has been slow to recover, we delivered another solid quarter. Our performance was driven by robust consumer PC demand and particularly good results from our emerging businesses MSN, Home and Entertainment, and Mobility and Embedded Devices,” Connors said.

In response to the sales increase, Microsoft has adjusted its outlook slightly. For its financial year ending June 30, 2004, the software maker now expects revenue between $34.8 billion and $35.3 billion and earnings per share between $0.86 and $0.88, including equity compensation charges of about $0.24. That’s up from its July estimate of revenue between $34.2 billion and $34.9 billion, and earnings per share between $0.85 and $0.87, including the $0.24 compensation expense.

For the quarter ending Dec. 31 the company expects revenue of between $9.7 billion and $9.8 billion, with earnings per share in the range of $0.23 or $0.24, including an expense for equity compensation of about $0.06.

In its full year forecast, Microsoft is counting on a “modest” improvement in corporate IT spending starting in January, the second half of Microsoft’s financial year, Connors said.

Microsoft had been too optimistic about corporate spending, Connors said. The amount of unearned revenue on Microsoft’s balance sheet for multiyear licensing contracts took a bigger hit than the company expected, dropping from $9.02 billion on June 30 to $8.25 billion on Sept. 30. Microsoft had forecast unearned revenue to drop by no more than $300 million.

Microsoft blames the drop on a slow start in the quarter, reorganization in the sales force and seasonal factors. Also, the company was distracted from selling software because of security issues such as the Blaster worm.

“Security concerns after a few very high profile attacks in the latter half of the quarter diverted the focus of our customers, our sales force and the channels away from new deals and renewals,” Connors said.

Analysts on the conference call expressed concerns about the drop in unearned revenue, suggesting that it may indicate that software buyers are not renewing or signing new multiyear subscription deals under Microsoft’s Software Assurance (SA) scheme.

Customers may be less interested in Microsoft’s SA plan because of the lack of new products in the near horizon, the analysts said. Longhorn, the code name for the next Windows client, isn’t expected until 2006. It will be accompanied by a slew of other new Microsoft products. One reason customers sign up for SA is to cover the cost of upgrading to the next version of a Microsoft product.

Microsoft already expanded its SA program to appease customers who complained the plan cost too much and offered too little. It may add more, should customers indeed be shying away from the plan, Connors said.

“If we have to add more benefits to the SA value program, we will do that,” he said.

Microsoft’s shares on the Nasdaq ended the regular day’s trading up a fraction at $28.91. In trading after hours the stock had dipped more than 4 percent, to $27.61.