Microsoft Profit Up On Consumer Demand

The software giant says its growth in its server and tools division is promising but overall, client software spending outpacing corporate IT market.

Microsoft Thursday reported a net profit of $2.61 billion for its first fiscal quarter, up 27 percent, pointing to consumer demand as the reason for improving revenues for its products.

Excluding a variety of charges, Microsoft earned 30 cents a share beating Wall Street's estimates by a penny. But those charges, included $680 million in after-tax equity compensation.

But Microsoft did surprise with its revenues, which were $8.22 billion, well above analysts' expectations of $8.1 billion.

Microsoft's latest results also mark an improvement over last year, when the company reported a net profit of $2.04 billion, or 19 cents a share, on sales of $7.75 billion.

Outside of the profit news, investors and analysts were most interested what Microsoft said about the future, and its outlook appears to be strong.

Microsoft CFO John Connors said the Redmond, Wash.-based software giant expects its second quarter earnings to be 29 cents to 30 cents a share, with revenues expected in the $9.7 billion to $9.8 billion. Microsoft's guidance is even stronger than analysts' forecasts, which expected a profit of 28 cents a share on sales of approximately $9.3 billion.

Microsoft cited several reasons for its strong financial results and rosy outlook.

"Robust consumer demand for PCs during the back to school shopping season fueled better than expected Client revenue during the quarter," Connors reiterated during the conference call to investors.

Both Gartner and IDC earlier this month reported double digit unit shipment growth in the September quarter. Microsoft's report mirrors similar strength about future sales recently indicated by chip giant Intel .

But on the corporate side of the business, Connor said there are still reasons for concern suggesting that, "corporate IT spending was slow to improve this quarter." But Microsoft did say there was growth in its server and tools division.

"Server and Tools grew a solid 15 percent over last year to $1.87 billion this quarter. Windows Server, Microsoft SQL Server and Microsoft Exchange all experienced double digit revenue growth, driven by a growing number of customers acquiring high-end enterprise editions. Windows Server 2003 has sold over two times as many licenses as Windows 2000 Server over the same period of time since launch," the company said in its financial report.

But some of the company's best performing divisions, were in the consumer sector, including its online service, gaming platform and mobile device units.

"MSN had another strong quarter with over 50 percent advertising revenue growth, and Home and Entertainment revenue grew by 20 percent, driven by the successful launch of the Xbox holiday offering. Mobile and Embedded Devices also demonstrated momentum this quarter with revenue growing to $53 million on strong results from our Windows Mobile, MapPoint, and Windows Embedded products. Additionally, this week AT&T Wireless announced the availability of the Motorola MPx200, the first Windows Mobile-based Smartphone in North America," Microsoft said.

But while there was strength in some of its businesses, Microsoft saw a steep decline in its unearned revenue, that is, the money it earns from multiyear contracts, which is recognized on its balance sheet over time. Unearned revenue, which was expected to decline by between $200 million to $300 million, actually was $700 million.

Connor chalked up the discrepancies to Microsoft's overly optimistic attitude on contracts from large companies and distracted sales people busy helping customers combat the Blaster virus that infiltrated PCs and servers this summer.






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