Microsoft Earnings Surpass Expectations

Microsoft Corp. on Thursday posted a 7 percent year-over-year rise in revenue to a record $10.8 billion for the quarter ended Dec. 31, 2004, on the back of strength in both its business and consumer operations.

This is the second time the software companys revenue has breached the $10 billion mark; the first was in the same quarter a year ago.

The results for the quarter under review included $2.2 billion in compensation expenses incurred in connection with the Employee Stock Option Transfer Program.

Operating income for the second quarter came in significantly higher at $4.8 billion, an increase of $3.3 billion over the same period in the prior year. Net income for the second quarter was $3.5 billion, with diluted earnings of 32 cents per share, exceeding the companys guidance by 4 cents and including stock-based compensation expense.

John Connors, Microsofts chief financial officer, who is leaving the Redmond, Wash., software company after 16 years, said the record revenue came from “across-the-board strength in both our business and consumer segments.”

“Our long-term approach to growing new businesses is paying off. Home and Entertainment delivered its first profitable quarter, and all three of the companys emerging businesses combined generated a nearly $700 million improvement in operating results compared to the second quarter of last fiscal year,” he said in a statement released after the financial markets closed.

Giving a breakdown of performance, Connors said the Server and Tools business grew 18 percent over the same quarter a year ago, with its SQL Server database software posting a 25 percent year-on-year revenue growth. Exchange 2003, which marked its one-year product launch anniversary during the quarter under review, had the fastest adoption of Exchange licenses ever, he said.

The Home and Entertainment business also moved into the black, posting positive operating income on record revenue, while the Xbox business showed record software sales.

“We also sold more consoles than our competitors during the critical holiday sales season in the United States, and increased Xbox Live membership to over 1.4 million members,” Robbie Bach, Microsofts senior vice president of the Home and Entertainment group, said in a statement.

Turning to the business outlook, Connors said that for the quarter ending March 31, 2005, management expected revenue in the range of $9.7 billion to $9.8 billion, with operating income of between $4.1 billion and $4.2 billion, including stock-based compensation expense.

Diluted earnings are expected to be between 27 cents and 28 cents a share, again including stock-based compensation expense.

For the full fiscal year to end in June 2005, management expected revenue in the range of $39.8 billion to $40.0 billion, with operating income of between $16.5 billion and $16.7 billion, including stock-based compensation expense, and diluted earnings per share of $1.09 and $1.11, including stock-based compensation expense, Connors said.

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