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Microsoft 3Q Profit Up Slightly As Sales Rise 8%

Third-quarter earnings were up just 2% over a year ago.
Microsoft posted a slightly higher profit and an 8% increase in third-quarter revenue, but said sales growth probably won't outpace PC shipments much longer--a trick that's helped results this year.

Microsoft earned $2.79 billion, or 26 cents per share, for the quarter ended March 31, up 2% from $2.74 billion a year ago. Revenue climbed to $7.84 billion, from $7.25 billion a year earlier, despite a drop-off in sales of corporate licenses during the last two weeks of March, CFO John Connors said during a conference call with Wall Street analysts Tuesday.

Aiding results: Sales of client-side Windows rose 10%, to $2.54 billion, during the quarter. That exceeded growth in PC shipments, as 56% of Windows PCs shipped with the more expensive Windows XP Professional versus Microsoft's standard version of Windows. Information-worker software, which includes Microsoft Office, posted a 9% revenue increase, to $2.33 billion, as Microsoft booked revenue that it had carried on its balance sheet as a result of long-term license contracts. Server software sales rose 21%, to $1.83 billion.

But Microsoft guided investors toward a slightly lower outlook for its fourth quarter and cautioned that it may not be able to far outpace sluggish PC sales next year. For the fourth quarter, ending June 30, Microsoft forecast revenue of $7.8 billion to $7.9 billion, and earnings of 23 or 24 cents per share. Analysts had expected earnings of 24 cents on revenue of $7.99 billion during the quarter. Sales of Windows Server 2003, due next week, won't help results this year, Connors says.

For fiscal 2003, Microsoft predicted it would earn $1.04 to $1.06, on $33.1 billion to $33.8 billion in revenue. That would mean sales growth of at least 16.7% for 2003, compared with a 12% increase last year. But Microsoft forecast worldwide PC shipments would increase in the "low to mid-single digits" during fiscal 2004. Last month, market researcher IDC revised its 2003 forecast for PC-shipment growth to 6.9%, from 8.3%. And PC makers and resellers are warning of sluggish results during the March quarter.

"The last two years, Microsoft has been growing far in excess of PC unit growth," said David Meyer, a portfolio manager at Morgan Stanley, in advance of the results. "They've indicated they're near the ceiling for that, which means 70% of their business will be growing at PC growth rates, rather than in excess of them."

Connors says Microsoft's 2004 results won't benefit from a big shift toward Windows XP Professional or the transition to a more expensive licensing scheme, which helped results this year. Says Connors: "We continue to operate in a tough environment."