Microsoft Profit Tops Wall St. Estimates
siliconinvestor.com
By Scott Hillis Jul 19 12:39am ET
SEATTLE (Reuters) - Microsoft Corp. (MSFT.O) said its quarterly profit rose 10
percent, topping Wall Street estimates as gains on the software giant's huge
investment portfolio added to steady but lackluster performance in operations.
The Redmond, Wash.-based company said profits rose to $2.41 billion, or 44 cents a
share, from $2.20 billion, or 40 cents a share, a year earlier.
Microsoft was expected to earn 42 cents a share, according to consensus analyst
estimates compiled by First Call/Thomson Financial, which tracks such forecasts.
Revenues also met expectations at $5.8 billion, compared to $5.76 billion a year
earlier. Most analysts had trimmed their revenue forecasts after the company warned
last quarter that business demand for personal computers looked weak.
``When you really cut through it was not a blow-out quarter by any means. It was still
anemic,'' said Scott McAdams, president of Seattle-based brokerage McAdams
Wright Ragen.
Microsoft also recorded $1.13 billion in income from gains on investments, meaning its
net operating profit was $2.52 billion. A year earlier, investment gains were $485
million while operating income was $2.9 billion.
``Probably the single biggest factor was just the average size of our portfolio,'' Chief
Financial Officer John Connors, said of the big investment gains. ``This quarter was
probably a little higher than we had planned.''
Microsoft's holdings included $24 billion in cash and about $18 billion in various
investments, Connors said.
Shares in Microsoft rose as much as 1-1/2 to 80 in after-hours trading before falling
back to 78-7/8. The stock closed at 78-1/2 in regular trading, up 5/16.
SPECIAL ITEMS CLOUD PICTURE
Connors said the lower pre-tax operating profit was due to an unusually high year-ago
quarter that saw revenues and profits lifted by special items.
He also said that lower margins and higher marketing expenses in Microsoft's
fast-growing consumer business, as well as higher spending on projects like its X-Box
video game console, meant this quarter's profits did not rise as fast as in past
quarters.
McAdams said that operating income only rose by a single digit even after excluding
the year-ago quarter's special items -- $200 million in revenue from redemption of
coupons to spur sales of its Office software and $250 million booked as revenue from
reserves originally set aside for returned products.
``Even if you make those adjustments, those are not great numbers,'' McAdams said.
Connors said that highlights of the quarter included strong revenue growth in
Microsoft's consumer business, particularly its MSN unit, which runs an Internet
access service and operates a network of increasingly popular Web sites such as the
CarPoint car buying service and the GameZone computer game site.
Microsoft, which competes in those markets against America Online Inc. (AOL.N) and
Yahoo! Inc. (YHOO.O), said MSN Internet subscribers grew 20 percent to 3 million in
the quarter, with traffic to the network's Web sites expanding by 19 percent, and
average length of use by visitors rising 20 percent.
``There is a lot of upside there, a lot is going right,'' said Steve Kleynhans, a vice
president with analyst firm Meta Group. ``I think they will continue to grow that
business. They're not going to take on AOL anytime soon, but it will be a good strong
business.''
STILL CAUTIOUS ON FUTURE
But, as he did last quarter, Connors sounded a cautionary note on the near-term
growth of personal computer sales to businesses.
``We saw a mixed demand in the quarter for business PCs,'' Connors said, adding that
the market was weak in May but seemed to climb back somewhat in June. ``What
we're really hoping to see is really three months of sustained growth in the business
PC segment.''
Also in line with guidance he gave last quarter, Connors told analysts on a conference
call that he expected first-quarter profits to come in at 41 cents a share, up nearly 8
percent from a year ago.
Microsoft was on track to meet consensus forecasts of $1.88 a share for the whole
fiscal year, Connors said. He said revenues would climb 5 percent in the first quarter
and 15 percent for the whole year.
Connors said enthusiasm for Windows 2000, Microsoft's heavy-duty operating system
to run corporate computer networks, was strong, but Microsoft gave no details of sales
figures.
``We feel really good about the progress we're making in the server business,'' Connors
said without elaborating.
Many analysts said the quarter would be a good indicator of sales of the new software,
which was launched in February, but faces gradual adoption as businesses take time
to evaluate it or postpone purchases until later in the year, when complimentary
products hit the market.
``The real story with Windows 2000 is that it is going to be a breakout product next
year but it isn't this year. It hit the market when it couldn't make a significant difference
to their bottom line,'' Kleynhans said.
Connors said sales of Windows for common desktop computers were seen rising
``slightly'' in the first quarter, while sales for more powerful server machines would be
up, Connors said without elaborating. Sales of applications such as the Office suite of
business software would fall slightly from the year-ago period, he said.
Windows Millennium, or Windows Me, the newest version of the software for home
users that is to go on sale in September, would have little impact on the bottom line,
he said.
``We are not positioning it as a major release a la Windows 95 or Windows 98, and
our financial outlook does not include a significant uptick from Windows Me,'' he said.
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Chart:
stockcharts.com[PA!D20,2!F][VC60][IUH14,3!LK14!LL14]
I'm wondering if this would be a cup and handle?
MSFT posted good earnings. Are the antitrust problems too much to overcome?
Will MSFT and INTC earnings report be enough to turn the markets around today?
Is the market worried about Mr. Greenspan's speech later this week?
I guess we'll find out soon enough... |
