RealTime IT News

Servers, Windows Help Microsoft Beat the Street

Microsoft showed it still has growth left in it, announcing record revenue of $10.82 billion for the second quarter of its 2005 fiscal year on Thursday.

Growth was fueled by strong sales of the Windows client, SQL Server and Exchange 2003, while the Home and Entertainment, along with the Mobile and Embedded divisions delivered pleasant surprises.

The revenue represents a 7 percent increase over the same period last year.

Operating income for the second quarter was $4.75 billion, an increase of $3.27 billion for the quarter year-over-year. Last year's results for the quarter included a $2.21 billion charge for a change in how employee stock options were handled.

Net income for the second quarter was $3.46 billion; diluted earnings per share of $0.32 exceeded the company's guidance by $0.04; they included stock-based compensation expense. Analysts' estimates ranged from $0.31 to $0.34 for the quarter.

Microsoft upped its guidance for the next quarter to 8 or 9 percent growth. "We expect corporate and IT spending to remain healthy for the rest of the fiscal year. Corporate profits are strong, and worldwide GDP growth is good," said Microsoft CFO John Connors. "The world is buying a heck of a lot of servers."

Microsoft's Home and Entertainment group delivered its first profitable quarter, the company said, with 6.3 million units of the Halo 2 Xbox game sold. Microsoft claimed an Xbox installed base of almost 20 million consoles.

The Server and Tools business grew 18 percent from the same quarter last year. Revenue for SQL Server grew 25 percent year-over-year revenue, while Exchange 2003, launched a year ago, is the fastest-selling Microsoft product ever.

Once again, Microsoft Business Solutions (MBS), the division devoted to enterprise resource planning, customer relationship management and financial software packages for small to mid-market businesses, lagged, delivering $211 million dollars, just $1 million more than the same quarter last year.

"Revenue was flat," admitted Connors, explaining that growth in new license revenue was offset by a reduction in services revenue.

But Connors promised this division would get up to speed -- a promise the company has made for the last two quarters. He said that in the last 18 months, Microsoft bungled integrating Great Plains and Navision into the channel, marketing, operations and R&D.

Nevertheless, Connors said MBS's year-over-year growth will beat expectations, and, in 2006 and beyond, show good growth in relation to the entire market. "Microsoft will be at the top of business application growth," he said.

On the other hand, the Mobile and Embedded division surged, showing that Microsoft may be getting some traction in this area. Connors said Windows Mobile licenses for phone-enabled PDA and smart phones grew 200 percent from the prior year, and Microsoft sold more licenses during the second quarter than in all of the previous year.

Microsoft provided guidance for the next quarter ending March 31, 2005, saying revenue is expected to be between $9.7 billion and $9.8 billion, with operating income between $4.1 billion and $4.2 billion, including stock-based compensation expenses. Diluted earnings per share are expected to be $0.27 or $0.28, including stock-based compensation expense.

For the full fiscal year ending June 30, 2005, Microsoft is looking at revenue from $39.8 billion to $40.0 billion; operating income from $16.5 billion to $16.7 billion, including stock-based compensation expense; and diluted earnings per share in the range of $1.09 and $1.11, including stock-based compensation expense.

The company was rewarded with a $.10 bump in the stock, closing at $26.11.

Connors also shared some information about product roadmaps.

He said the next beta of Longhorn, the next version of Windows, will arrive in the first half of 2005. MSN Search's new technology also will launch in that time frame. The next beta of SQL Server will arrive by the end of the current quarter, with a full product launch in the summer.

Microsoft plans to "refresh" the entire MBS line this calendar year, and admitted that some of the products wouldn't get the star treatment. "The team did a lot of work in terms of the product roadmap and which of the products we were going to invest in and which of the products were probably going to see more of a maintenance model."

The call is expected to be Connors' last. Microsoft announced his move to venture firm Ignition Partners earlier this month.