Microsoft Has a Good Quarter but Shaves Outlook

Updated from 7:03 p.m. EDT

Software colossus Microsoft(MSFT Quote) reported fourth-quarter results Thursday that beat Wall Street estimates after excluding an $806 million investment-impairment charge. The company lowered guidance modestly for the fiscal full-year 2003.

For the fourth quarter ended in June, the world's largest software maker posted net income of $1.53 billion, or 28 cents a share, including an after-tax charge for investment impairments of $806 million, or 15 cents a share. Without that charge, net income came in at 43 cents a share. A year ago, the company earned $65 million, or 1 cent a share. That included after-tax charges for investment impairments of $2.63 billion, or 47 cents a share.

The Redmond, Wash., company said revenue rose 10% to $7.25 billion from $6.58 billion reported a year ago. Revenue was flat sequentially.

Analysts surveyed by Thomson Financial/First Call were expecting Microsoft to earn 42 cents a share on $7.08 billion in revenue in the fourth quarter.

"We believe the macroeconomic environment will continue to be challenging in the short term," CFO John Connors said on a postclose conference call. Later, however, he added, "It is our expectation that things improve modestly throughout the year."

Microsoft said it expects first-quarter revenue to range from $7 billion to $7.1 billion and earnings per share to range from 42 cents to 43 cents a share. Wall Street was expecting first-quarter earnings of 42 cents a share and revenue of $7.11 billion.

Microsoft reduced guidance slightly for the full year, projecting revenue to range from $31.4 billion to $32 billion and earnings to range from $1.85 to $1.91 a share. Previously, Microsoft predicted fiscal year 2003 revenue will range from $31.5 billion to $32.4 billion and earnings from $1.89 to $1.92 cents a share.

The consensus estimate is for Microsoft to earn $1.92 a share on $31.93 billion in fiscal year 2003.

For the fiscal full-year, Microsoft posted net income of $7.83 billion, or 1.41 cents a share, on $28.37 billion in revenue. That compares with net income of $7.35 billion, or $1.32 a share, on $25.3 billion in revenue in fiscal year 2001.

Connors said the numbers have come down slightly, following more detailed input from the field that Microsoft receives every fourth quarter.

Consistent with his forecast last quarter, Connors said he expects PC shipment growth in the low- to middle-single-digit percentages in the third quarter. "It does not appear to us there has been any significant change for better or for worse in demand for PCs," Connors said.

Analysts said they were not surprised that Microsoft remained conservative with guidance. "They generally kept a pretty positive tone especially compared to other high-tech companies," said Pacific Crest Securities analyst Brendan Barnicle, who has a buy rating on Microsoft.

Barnicle predicted that positive tone could counteract the guidance in trading tomorrow, and noted that the $50 mark that the company's stock hovered to in after-hours trading has been an entry point for some buyers. "It may open up a little light but probably closes flattish" Friday, Barnicle predicted for Microsoft stock. Barnicle owns shares of Microsoft, and his firm has done banking business with the company.

Microsoft's operating income rose to $2.87 billion in the fourth quarter, compared with $2.75 billion in the year-earlier period.

Driven by robust demand for the professional versions of Windows, Microsoft said its desktop platform business enjoyed a 9% boost to $4.97 billion in sales compared with a year ago. Enterprise software sales rose 4% from a year ago to $1.35 billion, with continued growth of Windows SQL server product line.

Microsoft reported shipping more than 3.9 million Xbox consoles -- under the company's initial forecast to sell between 4.5 million and 6 million Xboxes by the end of June. Approximately 20 million Xbox games have been sold by Microsoft and other companies.

Microsoft, which is shifting to a subscription-based payment plan for software used by business customers, reported short-term unearned revenue increased to $5.92 billion from $5.57 billion on March 31, and long-term unearned revenue increased to $1.82 billion from $1.35 billion on March 31.

Previously deferred revenue (most of which came from the new subscription plan) accounted for 20% of total fourth-quarter revenue, Microsoft reported. Connors sidestepped questions about how many customers have migrated to the new subscription payment plan.

Prudential Securities analyst John McPeake said unfortunately or fortunately, depending on how you look at it, the new payment system will reduce the volatility of Microsoft revenue. " I think they [investors] are going to understand this is more visibility," said McPeake, who has a buy rating on Microsoft and owns shares of the stock. His firm hasn't done banking with the company.

Connors also announced a new way that Microsoft is categorizing revenue and offered some guidance on how those categories will grow. He said "client" revenue from Windows will grow 7% to 8% for the full year and almost 20% for the first quarter. "Server" revenue growth is expected to be in the mid- to upper-teen percentages for the full year and in the mid-single-digit percentages in the first quarter.

"Knowledge worker" revenue from Microsoft Office and its Great Plains products is expected to see full-year growth in the low double-digit percentages and first-quarter growth in the high single-digit percentages. MSN sales are expected to enjoy full-year growth in the mid- to upper-single digit percentages. And sales from home and entertainment products -- representing Xbox consoles, games and Microsoft's television business -- should be up nearly 20% for the full year and up in the high single-digit percentages to about $600 million in the first quarter, Connors said.

Shares of Microsoft fell 89 cents, or 1.7%, to close at $51.11. In after-hours trading, shares declined to $50.70.