Investment loss halves Microsoft earnings

The slowdown in the US economy indirectly took its toll on software giant Microsoft which has reported 6% growth in revenue over...

The slowdown in the US economy indirectly took its toll on software giant Microsoft which has reported 6% growth in revenue over the same quarter last year, but saw investment losses drag its earnings down sharply.

Microsoft reported earnings on an adjusted basis of $0.23 per share, or $1.28bn (£0.89bn), for the fiscal first quarter of 2002 ended 30 September. Revenue as expected came in at $6.13bn (£4.25bn). Microsoft earned $0.46 per share on revenue of $5.8bn in the same quarter last year.

A consensus of analysts polled by Thomson Financial/First Call expected Microsoft to report earnings of $0.39 per share on revenue of $6.16bn. However, analysts did not take into account the investment losses when preparing their estimates, a Microsoft spokeswoman said.

The discrepancy between Microsoft's results and those expected by analysts had to do with a $1.24bn (£0.86bn) after-tax charge Microsoft took during the quarter, due largely to $980m (£680m) in losses from investments in the cable and telecommunications industries. That investment loss erased $0.20 per share from the company's earnings, which analysts did not take into account.

Excluding the investment loss and nonrecurring items, Microsoft said it would have earned $0.43 per share for the quarter, meaning it would have beaten analyst expectations by four cents.

Operating income totalled $2.90bn compared to $2.78bn in the prior year, Microsoft said.

While sales of its enterprise server software showed continued growth, desktop software declined in the first fiscal quarter, Microsoft said. During its earnings conference call, Scott Boggs, Microsoft's vice president and corporate controller, said sales of its Office productivity suite were "quite weak" compared to the previous year.

The company offered guidance on worldwide PC sales in the current quarter, which will include the Christmas shopping season, when the PC industry typically has its healthiest quarter. John Connors, senior vice-president and chief financial officer said that, lowering earlier expectations of single-digit growth, Microsoft now expects PC shipments to show no growth or decline by a few points. For the full fiscal year 2002, the company expects PC sales to be flat or decline slightly.

In the market for its .Net servers, which accounted for about 20% of Microsoft's revenue, Microsoft said growth continued, as it had expected it to. Sales of SQL Server, the database software that is now the fourth-largest-selling product at Microsoft, grew 40% in the first quarter. However sales of its enterprise products are somewhat secondary, a company spokesman said.

He added, "[Servers] are not something to ignore, but right now it is certainly about desktop software."

Looking ahead, Microsoft noted that it expects its current quarter to see gains from the introduction of its new Windows XP operating system, the Xbox video game console, and its new MSN 7 Web software and services. The uncertain consumer market will have an effect on those sales, Microsoft said.

Still, Connors said it still expected to sell 1 million to 1.5 million Xbox consoles during the quarter, following its 15 November launch. By the end of the year, as many as 6 million will have been sold worldwide, he said. Windows XP will also show healthy adoption upon its release next week, he predicted.

"We really look at Windows XP as a sure success," Connors said. "It's a question of when, not if, the consumer market picks up."

In its current quarter, Microsoft said revenue is expected to be between $7.1bn (£1.17bn) and $7.3bn (£5.1bn), with adjusted earnings per share of $0.49 or $0.50, slightly less than earlier analyst estimates.

"The biggest risk to our plans have continued to be PC demand declines and less corporate IT spending," Boggs said.

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