Microsoft’s 9% Sales Gain Helps Boost Profit By 37%

Jul. 22–Microsoft, riding a surge in worldwide PC sales, reported quarterly profit that jumped 37 percent on a 9 percent gain in revenue. The world’s largest software maker pointed to a strong showing across its divisions — from servers to its Xbox console.

Profits for the fiscal fourth quarter that ended June 30 increased to $3.7 billion, or 34 cents a share, from $2.69 billion, or 25 cents, a year earlier, the Redmond, Wash., company said. That included a tax benefit and the cost of the company’s recent $775 million antitrust settlement with IBM.

Sales of $10.16 billion matched the estimates of analysts polled by Thomson First Call. Analysts, on average, had estimated earnings per share would be 31 cents.

Microsoft also reported an 8 percent jump in revenue for the fiscal year, from $36.8 billion to $39.8 billion.

The fourth quarter “was a strong ending to a good year for Microsoft,” Chief Financial Officer Chris Liddell said in a conference call with analysts. “The IT spending environment, the PC hardware market and the server hardware market remain quite healthy.”

Microsoft also pointed to strong sales of its network software and revenue from a large number of multi-year contracts for its positive fourth-quarter results.

Microsoft’s stock closed Thursday at $26.44, up 0.95 percent. In after-hours trading, it was down 2 percent to $25.91.

Sales and marketing expenses were $2.8 billion, up 15 percent from $2.4 billion.

“Sales and marketing expenses were surprisingly high,” said Rick Sherlund, an analyst with Goldman Sachs, which provides banking services to Microsoft. “It was offset by non-operating income. Investors don’t like to see that.”

Overall, he added, the quarter was in line with Wall Street’s expectations. “The outlook is good in terms of accelerating growth and the flow of products,” he added. “There are a lot of new products coming. They will soon be back to double-digit earnings growth. That should be good for the stock.”

Microsoft is preparing to release the next version of its SQL database. In May, the company unveiled on MTV its next-generation Xbox game console, which is expected to hit stores this holiday season. Microsoft expects sales of Xbox, which boosted revenue for the company’s home and entertainment division by 22 percent during the fourth quarter, to help the division to break even by 2007. In 2005, the company shaved its losses for the division to $391 million from $1.2 billion the previous year.

According to Sherlund, analysts are expecting good things from Microsoft’s “twin engines of growth” — Longhorn, its next-generation Windows operating system, and the Office suite of software. Both are expected to hit the stores in fall 2006.

For the quarter ending Sept. 30, Microsoft forecasts revenue to be in the range of $9.7 billion to $9.8 billion. Earnings are expected to be 29 to 31 cents a share.

For fiscal year 2006, the company expects revenue to be in the range of $43.7 billion to $44.5 billion. Earnings per share are expected to be between $1.27 and $1.32.

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