Investment losses sap Microsoft profit

But investment losses of $2.6 billion soured what otherwise would have been a good close to Microsoft's fiscal 2001.

Including the investment charge, the software maker reported net income of $66 million, or 1 cent a share.

Excluding investment losses, net income for the fourth quarter was $2.4 billion, or 44 cents a share. A consensus of analysts polled by First Call had predicted fourth-quarter earnings of 43 cents a share on that basis.

Microsoft closed the year with operating income of $11.72 billion, or $1.32 a share, compared with $11.01 billion and $1.70 per share in fiscal 2000.

Fourth-quarter revenue grew 13 percent to $6.58 billion, up from $5.8 billion a year earlier. For the year, sales topped $25.3 billion, up from $22.96 billion from 2000.

Microsoft had earlier projected $6.3 billion to $6.5 billion in sales and earnings or 41 cents or 42 cents per share for its fourth fiscal quarter. But the company said last week that the quarter had gone better than expected, raising revenue guidance to the $6.5 billion to $6.6 billion range.

Ironically, influential Merrill Lynch analyst Henry Blodget lowered his fourth-quarter estimates one day before Microsoft raised its guidance.

Sequentially, Microsoft saw solid sales gains. During the third quarter the company reported revenue of $6.46 billion and $2.45 billion in income, or 44 cents a share.

In a Monday research note, Pacific Crest Securities analyst Brendan Barnicle said "Microsoft's revenue strength in the current economic environment and PC market (is) truly impressive."

Barnicle said Microsoft is "also benefiting financially from a more diligent audit of Windows licenses. Microsoft has led a nationwide amnesty program for software copyright violations. As part of the amnesty, customers can avoid any further liability by purchasing adequate software licenses."

"We are really pleased with the (fiscal fourth) quarter, which met the high end of our expectations," said John Connors, Microsoft's chief financial officer. Speaking to financial analysts after the market closed, Connors credited the quarter's results to strong Windows 2000 sales and a "broader and more compelling server line than a year ago."

Microsoft chalked up the $2.6 billion loss to a $3.9 billion charge related to cable and telecommunications investments.

The year ahead
Microsoft also gave guidance for its first quarter of fiscal 2002, ending Sept. 30. The company projected revenue of $6 billion to $6.2 billion and earnings per share between 39 cents and 40 cents.

Microsoft also raised its revenue projections for the full fiscal 2002 to $28.8 billion to $29.5 billion, with earnings per share of $1.91 to $1.95. In April, Microsoft projected fiscal 2002 revenue would be $28 billion to $29 billion and earnings between $1.90 and $1.94 a share.

"We expect operating income growth in (fiscal 2002) of about 8 percent on a reported-cap basis and 6 percent on a comparable-year basis," Connors said.

Microsoft's chief financial officer also sketched out projections for the remaining quarters of the year.

"We anticipate revenue in the (fiscal second) quarter to be up quite strongly on a sequential basis, probably by $1 (billion) to $1.4 billion due to the launches of Windows XP and Xbox during the quarter," Connors said. "The (fiscal third) quarter should look about the same, and the (fiscal fourth) quarter might be up a little from there."

Connors warned the guidance is "based on an economy that doesn't necessarily improve rapidly, but also one that doesn't significantly deteriorate." Microsoft assumes PC growth rates will be modest, but if they declined, "our profitability would be lower," he added.

Overall, Microsoft predicts modest PC growth during fiscal 2002, "probably slower than this year by 1 to 2 percentage points," Connors said. That works out to PC growth "in the mid-single digits," he added.

"The economy is what the economy is," Connors said. "We will stay focused on developing products and services that change the way people work and live."

Microsoft also offered guidance by product group, projecting the desktop-software business to grow 6 percent to 7 percent during fiscal 2002 from the previous year. But Connors warned to expect "lower than that by a few percentage points in the first fiscal quarter."

Specifically, desktop-application sales would grow 7 percent to 8 percent for the full year, but "be up only slightly on a percentage basis due to very soft PC demand" during the first fiscal quarter, Connors said. He attributed some of that sales softness to slowing sales in anticipation of Windows XP's Oct. 25 release.

Microsoft projects enterprise operating system and services revenue to grow 20 percent for fiscal 2002 and slightly below that for the fiscal first quarter.

Consumer software, services and devices sales revenue is expected to be $3.5 billion to $4 billion, "about doubling from what we reported in fiscal year (2001), driven largely by Xbox and continued growth by MSN." For consumer services specifically, which includes MSN, Microsoft forecasts 25 percent year-over-year growth in fiscal 2002.

At Xbox's Nov. 8 launch, Microsoft plans to have 600,000 to 800,000 units in stores, with the company projecting holiday sales of 1 million to 1.5 million consoles. "For the full fiscal year, which represents about eight months of sales, we are currently planning to sell between 4.5 (million) and 6 million consoles worldwide," Connors said.

Sizing up the quarter
Desktop application revenue topped $2.51 billion, up 10 percent from $2.29 billion a year earlier. The results include sales from Great Plains Software, an accounting software maker Microsoft recently acquired. Connors put Great Plains revenue, which includes bCentral, at $70 million for the quarter.

Office revenue grew 4 percent. But while analysts had predicted a big windfall because of licensing changes compelling upgrades, Microsoft has yet to realize those gains, Connors said. "The net result of the licensing Software Assurance program we announced I think was negligible, not even measurable in the fourth quarter," he said.

Sales of Windows desktop software topped $2.04 billion, up 16 percent year over year. Microsoft credited the gains to an increased percentage of Windows 2000 sales. Windows 2000 accounted for 41 percent of 32-bit operating system sales, up from 35 percent from the third quarter.

Enterprise software sales grew 20 percent year over year to $1.29 billion.

Combined revenue for desktop and server software and services revenue rose 14 percent to $5.84 billion from $5.12 billion a year earlier.

Sales in the consumer software, services and devices group, which includes Internet access and online services, grew 22 percent year over year to $509 million. Revenue from consumer commerce investments, which includes Expedia, HomeAdvisor and Carpoint, reached $96 million, compared with $88 million in the fourth quarter last year. MSN access and advertising revenue grew 50 percent in the quarter.

Sales in the "other" category--primarily hardware and Microsoft Press--fell to $128 million, from $176 million in the fiscal fourth quarter of 2000.

Original Equipment Manufacturer (OEM) revenue rose 16 percent to $2 billion from $1.73 billion a year earlier and nudged past the third quarter's $1.99 billion.

Internationally, the South Pacific and the Americas accounted for $2.66 billion in sales compared with $2.23 billion a year ago and $2.4 billion in the third quarter; the region's sales rose 19 percent year over year. Revenue for the Europe, Middle East and Africa region was flat year over year at $1.15 billion but fell from $1.2 billion in the third quarter. Asia saw revenue increase 17 percent to $777 million from $689 million a year earlier but dipped from the third quarter's $836 million.

Microsoft's shares were up $2, or 2.83 percent, to $72.57 after the bell Thursday.