Despite Industry Slide, Server Sales Propel Microsoft

In spite of the weakness in the PC segment, Microsoft announced $6.13 billion in revenues for its first fiscal quarter, up from the $5.77 billion in the comparable quarter last year.

When a company that has been as unabashedly bullish about the PC industry as Microsoft Corp. has starts worrying over the prospects for business and consumer desktops, you know its bad.

During its quarterly earnings call with press and analysts on Thursday evening, Microsoft warned that it had seen business PC shipments decline 10 percent during the July-to-September quarter and consumer PC shipments decline even more.

The current quarter wont be much better, according to Microsoft, which is expecting a decline in PC sales of 2 percent or more. The Redmond, Wash., developer of operating systems and application software for PCs and servers is forecasting a modest recovery in PC shipments in the first half of calendar 2002. But that wont be enough to offset the sharp downturn in which the industry is currently caught, company executives said.

Until today, Microsoft had been predicting publicly that PC shipments would rise a couple of percentage points during the companys fiscal 2002 year, which ends next June.

In spite of the weakness in the PC segment, Microsoft announced $6.13 billion in revenues for its first fiscal quarter, up from the $5.77 billion in the comparable quarter last year. Net income for the three months ended Sept. 30 was $1.28 billion -- reflecting the effects of a $980 million loss the company incurred as a result of cable, telecommunications and Internet content and services investments it had made.

Excluding the charge, Microsoft would have posted a profit of 43 cents a share. Instead, diluted earnings for the quarter were 23 cents a share, as a result of the impairment charge. Microsoft was expected to achieve earnings of between 38 cents and 42 percent for the quarter, based on First Call projections.

Microsoft attributed its first fiscal quarter revenue up tick to strong enterprise server applications and combined desktop and server operating-system sales. Sales of Windows 2000 Professional, Windows 2000 Advanced Server, SQL Server 2000 and Exchange 2000 were all robust, company executives said. Sales of its Office 2000 personal productivity suite were off, especially in Asia, where Office is often bundled with PCs sold at retail, company officials acknowledged.

Microsoft officials also attempted to dispel industry watchers assertions that the companys new volume licensing program is leading to any customer defections, claiming that Enterprise Agreement volume licenses were up considerably for the quarter. Microsoft recently announced it would give enterprise customers an extension, from February 2002 to July 2002, to sign up for the companys controversial Software Assurance upgrade plan. Executives said they expected the delay to have no material impact on its fiscal 2002 revenues.

Chief Financial Officer John Connors told analysts on Thursdays call that Microsoft is expecting a solid revenue boost during the rest of its fiscal year from three new products it has in the pipeline: Windows XP, due to launch on Oct. 25; the XBox gaming console, due to launch on Nov. 15; and its Visual Studio .Net tool suite, which is expected to ship early next year. Windows 2000 and .Net server enterprise products also will help the company offset sluggish PC sales, Connors said. Connors did not talk about any kind of positive contribution to Microsofts fiscal year 2002 revenues from any of the Whistler server operating system products, which are now due to ship some time next year.

"We have a remarkable set of products that are going to get even better," Connors said. He categorized Extensible Markup Language Web services and Microsofts .Net infrastructure as "the glue" binding together the companys increasingly diversified product offerings.

"Microsoft can deliver shareholder value for many years to come," Connors assured analysts on Thursdays earnings call.

Mary Jo Foley is a senior writer with Baseline Magazine.