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Microsoft Reports Spike in Earnings ; Sales of Server Software, Video Game Make for Strong 2nd Quarter

Posted on: Friday, 28 January 2005, 21:00 CST

SEATTLE Microsoft Corp. said Thursday its fiscal second quarter more than doubled, beating Wall Street estimates with strong sales of server software and its Halo 2 video game.

The software maker also raised its earnings forecast for its full fiscal year, which ends in June.

For the final three months of 2004, Redmond-based Microsoft earned $3.46 billion, or 32 cents per share, compared with earnings of $1.55 billion, or 14 cents per share, in the same period last year.

Revenue was $10.82 billion, up from $10.15 billion in the same period in 2003.

The most recent quarterly earnings include a stock-based compensation expense of 3 cents per share. Without that expense, earnings would have been 35 cents per share.

Analysts surveyed by Thomson First Call were expecting earnings of 33 cents per share excluding stock-based compensation expense. Revenue was forecast at $10.56 billion.

Microsoft also reported its first-ever profitable quarter in its home and entertainment division, fueled by strong sales for its Xbox Live online gaming service and Halo 2. The unit reported operating income of $84 million for the three-month period, compared with a loss of $397 million in the same period a year earlier.

But Chief Financial Officer John Connors warned that the home and entertainment division would lose money again in the first six months of 2005, and likely won't achieve ongoing profitability until the second half of 2006.

In an interview, Connors also pointed to strong performance by the company's server and tools unit during the just-ended quarter. Operating income for that unit rose to $2.52 billion, compared with $2.15 billion a year earlier.

"We've been joking internally (that) our server and tools business is comparable to the New England Patriots in the NFL playoffs they just don't lose," said Connors, who recently disclosed that he is leaving Microsoft later this year to join a venture capital firm.

Analyst Alan Davis with McAdams Wright Ragen said the strong performance by that business shows that Microsoft is continuing to snag server business from rivals, including Unix.

For the full fiscal year ending June 30, Microsoft now expects to earn between $1.09 and $1.11 per share, up from previous guidance of between $1.07 and $1.09.

Revenue is expected to total between $39.8 billion and $40 billion, also an increase over Microsoft's previous guidance of between $38.9 billion and $39.2 billion.

For the six months ended Dec. 31, Microsoft earned $5.99 billion, or 55 cents per share, on revenue of $20 billion. That compares with earnings of $4.16 billion, or 38 cents per share, on revenue of $18.37 billion in the same period a year earlier.

Microsoft shares rose 48 cents, or nearly 2 percent, to $26.59 in after-hours trading. The stock gained 10 cents in regular trading on the Nasdaq Stock Market, before the report was released. In the past 52 weeks, the shares have traded between $24.01 and $30.20.

Source: Columbian

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