Microsoft Profit Lowest Since 1997
Microsoft Corp. reported Thursday its lowest quarterly profit since 1997 as it racked up $1.2 billion in investment losses, but the company’s software sales were better than Wall Street expected given the sagging demand for personal computers.
The world’s biggest software company said earnings fell to$1.28 billion, or 23 cents a share, for its first quarter ended Sept. 30 from $2.2 billion, or 46 cents, a year earlier. Without the investment write-downs, mainly for cable and telecommunications holdings, Microsoft would have earned 43cents a share in the quarter, topping Wall Street estimates averaging 39 cents.
The Redmond, Wash.-based company said quarterly sales rose 6% to $6.13 billion from $5.8 billion because of rising demand for business software and programs that run corporate networks, which command higher prices than PC software.
Microsoft shares closed up 72cents at $56.75 in regular trading on Nasdaq, then rose an additional 19cents to $56.94 in after-hours trading after the announcement.
“At the end of the day, Microsoft’s performance is pretty impressive,” said analyst Christopher Galvin of J.P. Morgan Securities, adding that investors were less concerned about the investment losses. “The stock has mostly traded on revenue and operating income.”
Microsoft officials said they did not see a huge effect from last month’s terrorist attacks, but the firm trimmed profit targets for the current quarter and its fiscal year.
The falloff in investment income prompted Microsoft to cut its forecast for the full fiscal year to earnings per share of $1.61 to $1.66, contrasted with consensus estimates of $1.88.
Personal computer sales fell sharply in the quarter that ended in September and will continue to be weak for the next nine months, Microsoft Chief Financial Officer John Connors said.
“While we believe in the long-term health of the PC [market], we think softness is likely to continue for the rest of the fiscal year,” he said.
Industrywide, PC unit shipments slid 10% in the quarter just ended, and Connors predicted they will fall an additional 2% in the three months ending in December. This will mark the first slowdown in PC sales in more than a decade. Sales should turn positive again in the fiscal second half for Microsoft but not enough to prevent a year-to-year decline, Connors said.
As Microsoft rolls out its Windows XP operating system and its Xbox video game console, the company expects revenue to climb in the current quarter to $7.1 billion to $7.3 billion, up at least 9% from $6.5 billion last year.
“It looks to me that Microsoft is predicting that they are not going to see much of a boost from XP this year,” said Roger Kay, an analyst with International Data Corp.
Microsoft has been hedging against slowing consumer demand by binding more of its corporate customers into costlier multiyear agreements for productivity software, especially the Office suite.
Objections to those pricing changes have forced Microsoft to delay some agreements but not enough to have a material effect on the company’s profit, Connors said. Most volume buyers soon will have to pay Microsoft an annual fee to avoid paying full price when new software programs come out.
As for Windows XP, the new operating system aimed mainly at consumers, the company said it still believes it will get most of its sales through new PCs, even if home users delay those purchases.
“Remember that the installed [PC] base is 400 million units,” Connors said. “Each quarter you don’t have growth, you have pent-up demand--we have got the product when people start buying.”
The falling value of Microsoft’s equity investments reverses what had been a boost to the bottom line. Microsoft invested heavily in communications, Web content and technology firms and had reported gains from those holdings as part of regular income during the Internet boom of the late 1990s.
Last quarter the company took $3.9 billion in pretax charges for the reduced value of some of those investments. Connors said the stakes now are worth $2.5 billion.
