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Microsoft Earnings Hurt By Investment Loss

The software developer booked net income of $1.28 billion for the first quarter, vs. $2.2 billion during the same quarter a year ago. Net income included a $1.24 billion after-tax charge for writing down the value of companies in its investment portfolio, particularly in the cable and telecom sectors.
Microsoft reported that net income for its fiscal first quarter fell 42% as it wrote down more than $1.2 billion in money-losing cable and telecom investments, but the vendor says sales should chug along steadily despite declining PC sales.

The software developer booked net income of $1.28 billion, or 23 cents per share, for the quarter ended Sept. 30, vs. $2.2 billion during the comparable quarter one year ago. Net revenue rose 6%, to $6.13 billion, compared with $5.77 billion last year. Microsoft's net income included a $1.24 billion after-tax charge for writing down the value of companies in its investment portfolio, particularly in the cable and telecom sectors. Excluding the 20-cent-per-share charge, Microsoft's earnings slightly beat analysts' consensus estimate that the company would report earnings of 38 to 42 cents per share.

Microsoft CFO John Connors told analysts during a conference call Thursday that sales of Windows 2000 Professional helped offset lower PC sales during the quarter, and sales of server applications and server operating systems grew robustly as well. "Our server business is in high gear," he said. IT advisory firm Gartner Dataquest this week said U.S. PC sales fell 18.7% by units during the third quarter, and worldwide shipments were off 11.6% compared with a year ago.

Connors warned that PC sales would decline by 10% during Microsoft's 2002 fiscal year, which ends in June. And he forecast that PC unit sales would show no growth, or decline by about 2% during the quarter, which ends Dec. 31.

That's in line with predictions by chipmakers Intel and Advanced Micro Devices Inc. this week. Intel says the traditional seasonal pickup in PC sales isn't likely to happen this year. And AMD says it expects PC units sales in the fourth quarter to rise only modestly from the third quarter.

As a result, Microsoft trimmed estimates for its second quarter and for fiscal 2002. The company now says it expects to report $7.1 billion to $7.3 billion in revenue during the December quarter, and book operating income of $2.9 billion to $3 billion. During the second quarter of 2001, Microsoft reported operating income of $2.58 billion, on revenue of $5.8 billion. That means operating profits would rise 16% during the current quarter, if the company meets the high end of its forecast.

New product releases could help. On Oct. 25, Microsoft plans to launch Windows XP, its new operating system for home and business PCs. Connors says it's a buyer's market right now. "There's tremendous value out there," he says. But he cautioned that it will take time for an installed base of about 400 million Windows users to upgrade to the new system. "We've got the product when people start buying those machines," he adds.

On Nov. 15, Microsoft plans to launch Xbox, its first game console.

For the 2002 fiscal year, Microsoft says it expects revenue of $28.4 billion to $29.1 billion, and operating income of $12 billion to $12.4 billion. That translates into an increase of 12% to 15% annually.

Shares of Microsoft closed Thursday up 72 cents, at $56.75.