Microsoft beats earnings predictions with record revenues

Buoyed by strong demand for PCs, Microsoft has reported better-than-expected quarterly sales and earnings, with the company noting that it sees signs of a recovery in corporate tech spending.

For the three months ended 31 December, Microsoft earned $1.55bn on record revenue of $10.15bn. The earnings figure included 20 cents per share to cover the cost of stock-based compensation, including a 14-cent one-time charge for the cost of a program that allowed employees to sell their underwater stock options.

In the same quarter a year earlier, Microsoft had earnings, after charges, of $1.87bn on revenue of $8.54bn.

Excluding the compensation-related expenses, the company was expected to earn 30 cents a share on revenue of $9.74bn, according to the average of estimates compiled by Thomson First Call. In October, Microsoft forecast revenue in the range of $9.7bn to $9.8bn, with earnings, excluding compensation charges, of about 30 cents.

Microsoft CFO John Connors said in a statement: "Consumer and corporate demand for PCs continued to exceed our expectations and resulted in solid double-digit revenue growth for Windows XP and Office products. 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."

Although Microsoft's most recent sales were ahead of forecasts, the company saw another drop in its level of unearned revenue, which is derived from long-term contracts. At the end of December, Microsoft had $8.25bn in such collections, down from $7.85bn at the end of December. The $400 million drop was steeper than some analysts had forecast, though not as steep as the drop the company saw in the prior quarter.

Microsoft shares fell slightly in after-hours trading, changing hands recently at $27.49 on the Island ECN. In regular trading ahead of the earnings report, the shares closed at $28.01, down 29 cents, or slightly more than 1 per cent.

In the quarter ended in September, the company posted better-than-expected earnings but saw a steep drop in long-term contracts amid worries about security.

Microsoft did hike its revenue forecast for the full year, projecting sales of between $35.6bn and $35.9 bn, up from a previous estimate of $34.8bn to $35.3bn. The company also forecast an increase in per-share earnings, excluding the costs of stock-based compensation.

While much of the company's sales growth came from an improved PC market, the company said it also saw some benefit from the weak dollar, which boosted revenue from Europe and Japan. Had the rates from the prior year’s second quarter been in effect in the most recent quarter, Microsoft said sales would have been approximately $312m lower.

Microsoft said it expects PC sales to continue to grow. "For the full fiscal 2004, PC shipments are expected to grow at double-digit rates," the company said in its earnings release. "In the second half of the fiscal year, we expect PC market growth to be driven by both consumer and business demand for PCs. We believe the overall server hardware sector and IT spending outlook is improving."

In terms of Microsoft's business units, its Client business, which includes standard desktop and notebook versions of Windows, saw sales rise 21 per cent from a year earlier, to $3.06bn.

The Server and Tools unit, which includes Windows Server and other server software, saw its revenue grew 21 per cent, to $2.13bn. Sales for the Information Worker unit, which includes Microsoft Office and other software, grew 27 per cent, to $2.9bn. Microsoft Business Solutions, which includes Microsoft's CRM software as well as products obtained in its Great Plains and Navision acquisitions, had revenue of $190m, a 41 per cent increase from the same quarter a year earlier. The mobile and embedded unit had sales of $63m, up from $38m a year earlier. The Home and Entertainment unit, which includes the Xbox and PC game units, was the only division to see a year-over-year drop in sales, with revenue falling 5 per cent to $1.27bn.

Ina Fried writes for CNET News.com