Questions Linger Despite Microsoft's Strong Results

Redmond, Wash.-based Microsoft reported net income under generally accepted accounting principles of $1.55 billion, or 14 cents a share, in the second quarter, which includes a stock-based compensation charge of 20 cents a share. Of that charge, 14 cents a share was related to the company's unique stock option-transfer program with J.P. Morgan.

A year ago, Microsoft posted second-quarter net income of $1.87 billion, or 17 cents a share, which includes stock-based compensation charges totaling 7 cents a share, as well as other charges and a one-time tax benefit.

Excluding charges, including stock-based compensation and a one-time tax benefit, Microsoft recorded pro forma net income of 34 cents a share in the second quarter, compared with 26 cents a share on a split-adjusted basis a year earlier. Analysts polled by Thomson First Call were expecting the company to post pro forma earnings of 30 cents a share, the higher end of the company's target range of 29 cents to 30 cents a share for the second quarter ending in December.

Second-quarter revenue rose 19% to $10.15 billion from $8.54 billion a year earlier, and 23% from $8.22 billion in the previous quarter. That soared past the consensus estimate of $9.74 billion for the second quarter, roughly the midpoint of the company's targeted range of $9.7 billion to $9.8 billion.

"Consumer and corporate demand for PCs continued to exceed our expectations and resulted in solid double-digit revenue growth for Windows XP and Office products," Connors said in a press release. "In the second quarter, the overall corporate IT market also began to show signs of a recovery, with increased demand for both desktop and server products."

Investors received a hint that Microsoft might benefit from strong PC sales earlier this month when Gartner and IDC said fourth-quarter PC sales grew 12% to 15%. Microsoft registered 12% PC unit growth and 13% server unit growth and raised its forecast for PC growth in fiscal year 2004 to the low double digits.

Microsoft Second-Quarter Revenue by Segment (in millions)
	2004	2003	% change
Client (Operating System)	$3,059	$2,534	20.7
Server and Tools	2,134	1,763	21.0
Information Worker (Office)	2,895	2,285	26.7
Microsoft Business Solutions	190	135	40.7
MSN	546	459	19.0
Mobile and Embedded Devices	63	38	65.8
Home and Entertainment (Xbox)	1,266	1,327	-4.6
Total Revenue	10,153	8,541	18.9
Source: Microsoft