Microsoft Revenue Hits $10 Billion, Earnings Down

Microsoft reported record revenues for its second fiscal quarter on strong sales of Windows XP and the Office productivity suite. However, operating income dropped year-to-year.

Microsoft Corp. on Thursday reported a new record in quarterly revenue, posting a 19 percent rise to breach the $10 billion mark in the second quarter of its fiscal year to end-December 2003.

In this latest quarter Microsoft, of Redmond, Wash., reported revenue of $10.15 billion, 19 percent higher than the $8.54 billion reported for the same quarter last year.

John Connors, Microsofts chief financial officer, chalked the strong results up to strong consumer and corporate demand for PCs, which continued to exceed Microsofts expectations and resulted in solid double-digit revenue growth for Windows XP and Office.

"In the second quarter, the overall corporate IT market also began to show signs of a recovery, with increased demand for both desktop and server products. Going forward, we will continue to focus on driving broader customer adoption of our latest enterprise products, including Office 2003, Windows Server 2003, Exchange Server 2003, and Small Business Server 2003," Connors said in a statement released after the financial markets closed.

But operating income for the second quarter under review was significantly lower than the same time last year, coming in at $1.48 billion for the period versus $2.23 billion in the prior year. Net income and diluted earnings a share were also lower at $1.55 billion and $0.14 for the second quarter, respectively.

By comparison, net income and earnings per share for the second quarter of 2003 were $1.87 billion and $0.17 per share, respectively, including after-tax stock based compensation expense of $709 million or $0.07 per share; a net $282 million or $0.03 a share charge for investment impairments; a $126 million or $0.01 per share tax benefit from the reversal of previously accrued taxes; and $141 million or $0.01 per share legal charge related to the state antitrust and unfair competition class action lawsuits.

Connors said the results for the second quarter of 2004 included after-tax stock based compensation expense of $2.17 billion or $0.20 a share, of which a taxed $1.48 billion or $0.14 per share related to the completion of the employee Stock Option Transfer Program.

Information Worker revenue grew 27 percent over the previous year on the back of strong adoption of Office 2003 by consumers and small businesses, which "drove sales in the retail and system-builder channels to surpass expectations. Customers acquiring Office during the quarter included Eli Lilly and Company, Safeco Corporation, and Ticketmaster," Connors said.

Connors also offered the following guidance for the current financial quarter to March 31: revenue of between $8.6 billion and $8.7 billion was expected, with operating income of $3.0 billion and $3.1 billion, including stock-based compensation expense of approximately $750 million. Diluted earnings per share are expected to be in the range of $0.23 and $0.24, including equity compensation expense of approximately $0.05.

For the full fiscal year to end June 2004, Microsoft expects revenue of between $35.6 billion and $35.9 billion; operating income of $10.3 billion to $10.6 billion, including an stock-based compensation expense of some $5.7 billion. Diluted earnings in the range of $0.82 and $0.83 a share are expected, Connors said.