Microsoft Net Dips on Legal Woes
Thursday April 22, 9:17 pm ET
By Reed Stevenson
SEATTLE (Reuters) - Microsoft Corp., the world's largest software maker, on Thursday posted a lower quarterly profit after charges to settle legal disputes, but revenue rose a better-than-expected 17 percent on stronger personal computer sales.
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The results topped Wall Street expectations and underscored the sustained recovery in technology spending. Microsoft shares rose almost 6 percent in after-hours trade to a two-month high.
Redmond, Washington-based Microsoft reported a profit of $1.32 billion, or 12 cents per share, for its third fiscal quarter ended March 31, compared with a profit of $2.14 billion, or 20 cents per share, a year earlier.
The results included stock compensation expense of $501 million and a $1.89 billion charge related to a settlement with Sun Microsystems Inc. and a fine imposed by the European Commission.
Microsoft's earnings also included $1 billion in investment income and its cash hoard ran up to $56 billion at the end of the third quarter, a rise of more than $3 billion.
Analysts and investors have pointed to that rising cash position as evidence Microsoft could raise its meager dividend payout, but the company has so far resisted, citing the need to settle the remaining legal disputes over its market-dominant Windows operating system.
Chief Financial Officer John Connors repeated his promise to provide clearer direction Microsoft's use of its fast-rising cash later this year.
"I think we've made a good progress on a number of legal fronts," Connors told Reuters, "Investors can certainly expect to hear more on that at the analyst meeting in July."
Personal computer shipments, a key driver of the company's sales, were up 14 percent, fueling a 17 percent rise in revenue to $9.18 billion from $7.84 billion a year earlier, Connors said.
"The next big catalyst is for them to do something with that cash that's constructive," said Charles Di Bona, analyst at Sanford C. Bernstein & Co.
WINDOWS, SERVERS DOING WELL
Microsoft said that revenue in its Windows-focused Client division grew 16 percent, while its Server and Tools division grew 19 percent and its Information Worker division responsible for Office grew 18 percent.
"PC and server growth has been phenomenal," said Clark Chang, analyst at Fulcrum Global Partners, "That's the big driver."
Excluding its charges, Microsoft's third-quarter per-share profit of 34 cents blew past analysts' estimates, which had averaged 29 cents a share, according to Reuters Research, a unit of Reuters Group Plc.
Connors said that the MSN Internet division showed "robust advertising growth" that offset declining revenue from dial-up Internet access subscribers.
Microsoft said its Xbox video game console remained on track for 14.5 million to 16 million shipments globally by the end of June, with 1 million subscribers to its Xbox Live online gaming service.
The company also said the Xbox had a "record-setting" sales in March, fueled in part by a price cut at the end of the month to $149 from $179.
OUTLOOK HEALTHY
For the fourth quarter of its fiscal year, which ends June 30, Microsoft expects net income of 23 cents per share, including a charge for stock-based compensation of 5 cents per share, on $8.9 billion to $9.0 billion in revenue.
Analysts on average had been projecting a profit, excluding stock-based compensation, of 27 cents per share for the June quarter on revenue of $8.86 billion, according to Reuters Research.
For Microsoft's upcoming 2005 fiscal year, Connors said it would be difficult to replicate the robust growth seen so far this year, partly because of the one-off nature of gains from the weaker dollar, investments and revenue recognition from long-term software contracts.
Analysts also warn that a potential drop-off in long-term contracts, which surged two years ago as Microsoft transitioned to a new licensing plan that encouraged customers to pay for software over time, could hurt future revenue since income from such contracts is recognized over time.
But Connors said, however, that improved technology spending could help renewals of those contracts, along with modest growth in the PC industry.
"We think the PC market will be up in the single digits," said Connors.
For the next fiscal year to June 2005, Microsoft said it expected a profit of between $1.16 and $1.18 per share, including stock-based compensation of 15 cents, on revenue of $37.8 billion to $38.2 billion.
Shares in Microsoft rose to $27.20 in after-hours trade, up from the Nasdaq close of $25.95. Including its after-hours gains, Microsoft stock was almost flat since the start of the year. |
