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Friday, July 23, 2004 - Page updated at 01:15 P.M.
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Microsoft posts strong earnings, but sees little change in job growth

By Brier Dudley
Seattle Times technology reporter

The jobs picture


The growth rate of Microsoft's job rolls is not expected to accelerate in fiscal 2005, which began July 1. While the company said it plans to hire 6,000 to 7,000 people, most of that will be to fill existing jobs.

CFO John Connors said Microsoft expects to add "a couple thousand new people, net," meaning the number of new jobs will be about the same level as fiscal 2004.

In fiscal 2004, the company had initially forecast 4,000 to 5,000 new jobs, but actually came in half that level or less. In fiscal 2003, Microsoft added more than 4,300 new jobs.

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Microsoft once again posted dramatic earnings amid a soft technology market, boosting sales 15 percent in the quarter ended June 30.

But the company also delivered a more modest outlook for the coming year and said it's adding significantly fewer employees than it had previously announced.

The slower job growth could lead the state to revise its economic forecast for the region.

Microsoft lowered its earnings forecast for the coming year in part because the massive dividend and stock buyback plan announced Tuesday will leave it with less cash to invest.

"That's the price of a $3 gift," said SG Cowen analyst Drew Brosseau in Boston, referring to the one-time dividend coming in December that will cost Microsoft $32 billion.

Although every business unit reported growth yesterday, the company is entering a relatively slow period until its next wave of new products arrives around 2006.

"We'll take a little bit of a dip this year," said Chief Financial Officer John Connors. "If we execute well, we might improve on that; '06, we should be able to accelerate a little bit from '05."

The company will also be challenged to match the fiscal year that ended last month, when it benefited from favorable exchange rates and strong demand for new PCs in every world region but Japan.

During its fourth quarter, Microsoft netted $2.69 billion on sales of $9.29 billion. During the same period last year, it netted $1.48 billion on sales of $8.07 billion, after factoring $796 million to settle a lawsuit over Netscape with AOL Time Warner.

Earnings per share were 25 cents. If you add in 5 cents per share for the cost of employee stock compensation and deduct a one-time 2-cent tax benefit, the earnings were close to the 28.5-cents-a-share consensus of analysts surveyed by Thomson Financial.

For the full fiscal year, sales were up 14 percent. Microsoft netted $8.17 billion on sales of $36.84 billion, up from $7.53 billion on sales of $32.19 billion.

Earnings per share were 75 cents, up from 69 cents the year before. Profits both years reflect the settlement of antitrust cases, including 17 cents a share that went to a Sun Microsystems settlement and European Commission fine in 2004, and 6 cents a share for various settlements paid in 2003.

Other challenges included an $838 million decline in long-term revenue from multiyear licensing sales that expired over the past year. Connors said some customers are switching to different types of licenses.

The company also reported lower interest earnings during the quarter, because it began moving cash into more flexible but lower-yielding accounts in anticipation of the shareholder-dividend plan. As of June 30, cash and short-term investments totaled $60.6 billion.

For the coming year, Microsoft forecast sales of $38.4 billion to $38.8 billion, operating income of $16.1 billion to $16.5 billion and earnings per share of $1.05 to $1.08. In April, before it settled on the dividend plan, it had forecast $1.16 to $1.18 per share.

Highlights of yesterday's report included the Information Work group's 23 percent sales growth, the MSN group posting its first profitable year and the Server group's 20 percent growth.

"This was a great quarter that closed a terrific year," Connors told investors on a conference call. "Microsoft has been very proud of both our absolute and relative performance."

Connors jokingly compared the $4.6 billion in sales growth to the sales of some high-profile Internet companies. "It's just a bit lower than growing a couple of Yahoos! or two eBays," he said.

Several stock analysts said the lowered outlook was not a surprise, given the dividend plan, and they were pleased with the company's performance.

"So much of software, at least enterprise software, has done really pretty poorly ," said Jonathan Geurkink at Ragen MacKenzie in Seattle. "Set against that, Microsoft really looked pretty solid."

To keep earnings on track, executives have directed managers to cut costs. Also, the rate of job growth has slowed.

Over the past year, Microsoft added 2,000 new jobs, less than half the 4,000 to 5,000 it had forecast last July. It said that forecast was erroneous, and that the lower rate of job growth was not from cost cutting.

"We got our wires crossed internally and we thought they were talking about new position growth and they were talking about total hires," said spokesman Mark Murray.

But the company also provided that forecast to the state of Washington, which used it to model economic growth in the region, said Roberta Pauer, the state's regional labor economist in Seattle.

"They're definitely pausing, in their rate of hiring, which is certainly a cost-reducing move, and they are also obviously transferring assets to stockholders," Pauer said.

In its 2005 fiscal year ending next June, Microsoft expects to add "a couple thousand new people, net," Connors said. Overall, the company plans to hire 6,000 to 7,000 people in fiscal 2005, including about 3,000 locally, but most will replace openings created by attrition.

The slower hiring is not "worrisome" but it could lead to some adjustments, Pauer said.

"Microsoft is no longer a rocket-to-the-moon kind of company," she said. "It's out of that stage. It's now big, mature and its growth rate is going to be appropriate for a mature company, and that means dividends instead of sharp increases in stock price; it means a modest rate of work-force expansion."

That also makes Microsoft more akin to the other giant in town.

"There is no need to worry about Microsoft and there's no need to worry about Boeing but there is a need to be realistic," Pauer said. "These are two solid, mature companies, but they are not going to be producing extraordinary economic growth for the region. At this point, they're just going to be solid players, solid legs in the stool."

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com

Copyright © 2004 The Seattle Times Company

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