Microsoft In A League Of Its Own
Microsoft Corp. has had to write down $9 billion in its last two fiscal years due to losses on telecom company investments, but the company's outlook remains promising, analysts said.
And the company's guidance on the future is bullish at a time when other technology businesses are laying low, said David Readerman, with Thomas Weisel Partners.
Microsoft's outlook remained stronger than much of the rest of the lackluster software industry, which has struggled with sharp cutbacks in corporate spending.
"It is pretty bullish not only for the momentum they've achieved but for what has been a wicked tough (information technology) spending environment," he said. "Microsoft stands in a league of its own."
Still, an after tax charge of $806 million stemming mostly from investments made in AT&T and other telecommunications companies helped push Microsoft's fourth-quarter profit below analysts' expectations, despite easily surpassing its bare-bones profit from a year ago.
Compared to its average sales growth rate of 38 percent during the 1990s, growth has slowed, to 16 percent in 2000, 10 percent in 2001 and 12 percent most recently.
To get back on the higher growth track, the software giant has been diversifying into new areas, such as high-end enterprise software and consumer-oriented products, including its 8-month-old Xbox video game console.
"We exited the latest fiscal year in a stronger position than we entered," Chief Financial Officer John Connors said.
"It's the beginning of a transition for them," said Sanford C. Bernstein analyst Charles Di Bona.
Microsoft announced Thursday that for the quarter ended June 30, it had profits of $1.53 billion, or 28 cents per share, compared with a profit of $65 million, or 1 cent a share, in the same period last year.
The "investment impairments" stem from investments made in AT&T and other telecommunications companies as part of Microsoft's bid to offer new services through cable networks and other initiatives. In the same quarter a year ago, Microsoft took an after-tax charge of $2.63 billion or 47 cents a share for investment impairments.
In fiscal years 2001 and 2002, Microsoft has taken $9 billion in investment impairment charges, mostly for telecom investments.
"They're big numbers," said Scott McAdams, chief executive of McAdams Wright Ragen. "It's a little disconcerting but it's not all that important. What people care more about is what are the earnings like and what is the guidance going forward."
"Nine billion is a staggering number," said Readerman, an analyst with Thomas Weisel Partners. "But Microsoft sits at the baccarat table of global telecom and (information technology) investments. They bet big and they lost big, but with $38 billion in cash, they can keep playing."
Microsoft had revenues of $7.25 billion for the quarter, a 10-percent increase from the $6.58 billion for the same period a year ago.
Analysts polled by Thomson Financial/First Call were expecting earnings of 42 cents per share for the quarter on revenues of $7.1 billion.
Microsoft stock closed Thursday at $51.11, down 89 cents a share on the Nasdaq stock market. In after-hours trading, shares were down another 51 cents.
Connors said that sales of the new Windows XP operating system and other desktop computer software remained strong. He said the company increased its sales to corporate customers despite the slow down in technology spending. The company also reported high enrollment in a new licensing program for businesses and governments that requires them to make annual payments for automatic upgrades.
Microsoft plans to add 5,000 employees to its roughly 50,000 work force, with 30 percent to 40 percent of the new hires in the Puget Sound region. The positions are for research and development, sales and support, Connors said.
Microsoft said that sales of its new Xbox video game consoles reached 3.9 million for the fiscal year. The company slashed the price on its Xbox by $100 a console to $199 in May but doesn't have plans to change its price, said marketing director John O'Rourke.
Microsoft's MSN Internet access business also made gains, with 8.7 million subscribers, up by 700,000 customers.
"Each time, we've told you we thought additional impairments were unlikely," said Scott Boggs, corporate controller. "It would appear that none of us are much good at predicting the market."
The company is also changing the way it will report its revenue, breaking it down into five categories, such as MSN, Home and Entertainment and Knowledge Worker, which refers to its desktop software application sales for companies.
Connors said the company currently has no plans to change the way it reports stock options as some are proposing as an accounting reform.
Corporate technology spending is expected to remain sluggish, Connors said, who offered revenue guidance of $7.0 billion to $7.1 billion for its current quarter and earnings per share of 42 to 43 cents.
For the fiscal year, Microsoft had profits of $7.83 billion, or $1.41 a share, compared to $7.35 billion, or $1.32 a share, in 2001. Revenue for the year was $28.4 billion, up 12 percent from $25.3 billion the previous year.
For the current fiscal year, Connors gave guidance of revenue between $31.4 billion to 32 billion and earnings per share between $1.85 and $1.91 per share.