Microsoft earnings steam ahead
Published: 16 Apr 2003 08:28 BST
Microsoft beat Wall Street expectations on Tuesday, chugging ahead despite a weak economy and slow technology spending.
The software giant reported third-quarter earnings of $2.79bn (about £1.8bn), or 26 cents a share, compared with $2.74bn, or 50 cents a share, a year earlier. In January, Microsoft announced a two-for-one stock split, making the year-ago comparison 25 cents a share if the split is figured in.
Revenue rose 8 percent to $7.84bn, from $7.25bn a year earlier. Sequentially, sales declined from $8.54bn in the fiscal second quarter. The company said operating income was up 13 percent, to $3.72bn from $3.3bn a year ago.
A consensus of analysts polled by First Call anticipated earnings of 24 cents per share on revenue of between $7.7bn to $7.8bn, and operating income between $3.4bn and $3.5bn.
Microsoft announced earnings on a Tuesday rather than its usual Thursday to accommodate people celebrating the Passover holiday, according to a company representative. Microsoft's third fiscal quarter closed on 31 March.
In a statement issued on Tuesday, John Connors, Microsoft's chief financial officer, set a cautious but optimistic tone for the company's fourth quarter and for fiscal 2003, which ends 30 June.
"We reported another quarter of strong revenue and operating income results in a very tough environment," Connors said. He positioned new enterprise products, due for release in the next six months, to bring in the capital that the company needs to rise above hard times. "We believe that these innovative products will enable our customers to get more productivity and value out of their information technology investments," he said.
Connors also set expectations for fiscal 2004 and issued guidance for the fourth quarter, for which Microsoft expects revenue to be between $7.8bn and $7.9bn, operating income to be between $3.1bn and $3.2bn and earnings per share to be either 23 cents or 24 cents. For fiscal 2004, Microsoft projects revenue between $33.1bn and $33.8bn, operating income between $14.8bn and $15.1bn and earnings per share between $1.04 and $1.06.
Unearned revenue's impact
As in previous quarters, Microsoft resisted the downward pull of the economy by way of unearned revenue, which is revenue for software that has yet to be delivered. Unearned revenue accounted for about 26 percent of the company's total revenue during the third quarter, compared with 22 percent of revenue in the second quarter and 23 percent in the first quarter.
Money collected through Microsoft's Licensing 6 programme is counted as unearned revenue. In May 2001, the software company announced the programme, under which companies pay up front for products under two-year or three-year "Software Assurance" contracts. The programme met with stiff customer resistance for removing the choice of when to upgrade and for raising licensing fees from 33 percent to 107 percent, according to research firm Gartner. Microsoft completed the transition to Licensing 6 on 1 August.
A last-minute sign-up spree for Licensing 6 led to a huge spike in Microsoft's unearned revenue during the last part of fiscal 2002 and the start of the new fiscal year. During the first quarter, unearned revenue swelled to $9.13bn, mostly from licensing, up from $5.85bn a year earlier. The company ended the second quarter with $8.83bn in unearned revenue.
But as Microsoft begins to realise unearned revenue on the balance sheet, the big boost is starting to level out.
"We expect that deferred revenue will continue to show a decline for the next couple of quarters before the company can begin rebuilding its unearned revenue balance," Merrill Lynch Jason Maynard wrote in a Tuesday research note.
Unearned revenue declined $304m from the second quarter to the third, according to Microsoft. The company closed the third quarter with $8.53bn in unearned revenue. It expects to realise $2.55bn in the fourth quarter, $1.94bn in the first quarter of fiscal 2004, $1.4bn in the second quarter, $916m in the third quarter and $1.73bn in the last quarter.
The earliest wave of Licensing 6 participants won't be ready to sign up again, assuming that they choose to do so, until 31 October.
"This the first date on which Software Assurance will begin to expire," said Paul DeGroot, an analyst with market researcher Directions on Microsoft. "This would be for customers who bought SA... as soon as SA was available, on 1 October, 2001."
Still, Microsoft is getting ready to release many new products over the next two to three quarters, which could help boost revenue. But many of the products are focused on the enterprise, where adoption tends to take place at a slower rate.
The products to be launched this year include: Windows Server 2003, scheduled for a 24 April release; Office 2003; Exchange Server 2003; Windows Rights Management Services (RMS); and Real-Time Communications Server 2003.
Many interdependencies between products means "that if one slips past the ship date, others will, too", DeGroot said. For example, Office relies on features in Exchange and RMS. A delay of RMS could affect Office, while an Office delay could hold up Exchange.
Segment results
Third-quarter revenue for Microsoft's Client group, which covers desktop and embedded operating systems, was $2.54bn, compared with $2.3bn a year earlier and $2.55bn in the second quarter.
The Information Worker division, which handles Office and other desktop productivity software, saw sales rise 9 percent to $2.33bn from a year earlier. The group reported $2.29bn in the second quarter.
The online unit MSN posted revenue that rose to $508m, compared with $404m a year earlier and $459m in the second quarter. MSN subscription revenue rose 9 percent and paid services -- largely from paid search and ads -- rose 55 percent.
Revenue for Microsoft's Home and Entertainment division, which looks after the Xbox game console, declined 42 percent to $453m, from $778m a year earlier. (Second-quarter revenue topped $1.33bn.) Lower Xbox sales largely contributed to the dramatic decrease in revenue.
CE/Mobility posted sales of $38m, up from $21m a year earlier.
Sales of Server Platforms reached $1.83bn, up 21 percent year over year. During the second quarter, revenue reached $1.76bn.
Business Solutions, which covers Great Plains and bCentral, reported a third-quarter revenue of $147m, compared with $75m a year earlier and $135m in the second quarter.
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