Microsoft beats forecasts, but legal costs hurt

The software maker said it earned US$1.32 billion, or 12 cents per share, on revenue of US$9.18 billion, for the three months ended March 31. That compares with earnings of US$2.14 billion, or 20 cents per share, on revenue of US$7.84 billion in the same quarter a year earlier.

The results included stock-based compensation expenses that amounted to 5 cents per share and legal charges equaling 17 cents per share. Excluding those items, Microsoft would have had earnings of 34 cents per share, ahead of the 29 cent First Call estimate and the company's own predictions.

In January, Microsoft predicted per-share earnings of 23 cents or 24 cents, factoring in a charge of 5 cents for stock-based compensation expenses, with revenue expected to be between US$8.6 billion and US$8.7 billion.

"All of our businesses met or exceeded our expectations this quarter," Microsoft Chief Financial Officer John Connors said in a statement Thursday. "Overall corporate (information technology) spending continued to improve, and we expect to see healthy demand through the end of our fiscal year."

For the current quarter, which ends in June, Microsoft predicted earnings per share of about 23 cents per share, including 5 cents worth of stock-based compensation expenses, on revenue in the range of US$8.9 billion to US$9 billion. Those figures are roughly in line with what analysts had been expecting from the software maker.

The earnings report shows that Microsoft's legal issues are taking a toll on the bottom line, though the company has more than US$50 billion in the bank. Last month the EU handed down a 497 million euro fine (US$613 million at the time; US$590 million at current exchange rates) against Microsoft, while the company has also paid out nearly US$2 billion in accordance with a settlement earlier this month with Sun.

Microsoft also offered guidance for the coming fiscal year, which ends in June 2005.

The company said to expect revenue in the range of US$37.8 billion and US$38.2 billion. Operating income is expected to be anywhere from US$15.9 billion to US$16.3 billion, including stock-based compensation expenses of approximately US$2.5 billion. That's expected to amount to per-share earnings of between US$1.16 and US$1.18, including stock-based compensation expenses of approximately 15 cents per share.

Microsoft said its cash and short-term investment balance rose to US$56.4 billion, up from nearly US$53 billion in December and US$49 billion a year earlier, and noted that its revenue for the quarter was boosted by the weak dollar. Had exchange rates been what they were a year ago, Microsoft said its revenue would have been US$350 million lower.

Microsoft's balance of unearned revenue--that is, monies received as part of long-term contracts--declined US$326 million from the prior quarter, in part because of a US$248 million drop in unearned revenue from various volume license programs. Microsoft's unearned revenue balance is closely watched by analysts as a measure of gauging future results.

The company had cautioned that the balance would drop in the most recent quarter as it began phasing out an older Upgrade Advantage license program.

Individual units
As for its individual business units, Microsoft noted that it saw 17 percent growth in its three main ones, which include those responsible for desktop and server versions of Windows as well as the division that handles Office.

Microsoft said revenue in its client unit, which handles the desktop version of Windows, grew from US$2.5 billion a year ago to US$2.9 billion in the most recent quarter. The server and tools unit, which deals with Windows Server, saw sales rise to US$2.2 billion from US$1.8 billion a year earlier, while sales in the information worker unit, which oversees Office, grew to US$2.7 billion from US$2.3 billion in the year-ago quarter.

Among Microsoft's smaller units, MSN saw revenue increase to US$591 million from US$508 million a year ago. The home and entertainment unit, which includes the Xbox game console in its purview, saw sales hit US$530 million, up from US$453 million. The Microsoft Business Solutions unit, which sells business software largely to small and midsize companies, saw sales inch up to US$153 million from US$147 million a year ago. The mobile and embedded unit, which handles sales of Windows Mobile for handhelds and smart phones, saw sales increase to US$61 million from US$46 million a year earlier.

Microsoft also broke out the profitability of its individual business segments on the day of its earnings. The company often releases such information later, as part of its formal filing with the Securities and Exchange Commission.

Microsoft noted that operating income in its client unit fell 16 percent, to US$1.6 billion, even though sales rose by a similar percentage, with the drop largely attributed to US$700 million in costs associated with the Sun settlement. The server and tools unit also took a hit, stung by US$1.22 billion in legal expenses, posting a US$635 million operating loss. The information worker unit, which was not hit by legal charges, saw operating income rise 14 percent, to US$1.9 billion.

The business solutions unit narrowed its operating loss to US$65 million from US$92 million a year earlier. MSN posted a US$107 million profit, a reversal of a US$139 million loss a year earlier, as a 43 percent increase in advertising revenue more than offset a decline in subscription revenue.

The mobile unit narrowed its loss, from US$72 million a year earlier to US$38 million. The home and entertainment unit also posted a narrower loss--US$209 million as compared with US$277 million a year earlier.

Microsoft shares were up 5.6 percent, or US$1.45 per share, to US$27.40 in after-hours trading. Shares of the software giant were also up during the day, closing nearly 2 percent, or 50 cents per share, higher at US$25.95.