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Friday, April 29, 2005 - Page updated at 12:00 a.m.

Microsoft delivers no fireworks, fears

Seattle Times technology reporter

Microsoft had a great quarter, compared with IBM.

But the folks in Redmond would prefer you don't mention Google's recent showing.

Microsoft sold a bit less software than it expected, in part because U.S. companies are buying less desktop software, but its profit still met Wall Street expectations.

Analysts said the quarterly financial performance was fine, but they don't expect the stock to pick up until later this year.

"It's neither good nor bad, it's just in-line," said Gene Munster at Piper Jaffray in Minneapolis.

Two weeks ago, IBM spooked technology investors by reporting just a 2 percent sales growth and missing Wall Street's forecast by $700 million. Then Google blew past estimates last week, nearly doubling sales.

Microsoft's sales grew 5 percent to $9.6 billion in the quarter ended March 31 the third in its fiscal year — up from $9.2 billion a year ago. The company had told investors to expect $9.7 billion to $9.8 billion.

MSN, the division that goes head to head with Google, reported a 5 percent drop in sales.

Scott Di Valerio, corporate controller, called it a "good" quarter. He reported the earnings yesterday since the company's new chief financial officer, Chris Liddell, doesn't start until May.

"In short, business was good during the quarter, and solid business fundamentals remain in place," Di Valerio said.

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Profit nearly doubled to $2.6 billion after factoring in a $768 million charge to cover antitrust and patent lawsuits.

The year-to-year comparison is distorted by an even bigger legal payout the company made a year ago, when its profit was $1.3 billion after a $1.92 billion legal charge.

Operating income rose only slightly, when legal charges and stock compensation expenses are excluded — $4.7 billion in the quarter versus $4.5 billion the year before.

On a per-share basis, earnings were 23 cents. Disregarding onetime legal expenses and stock-compensation costs, per-share earnings were 32 cents. That's precisely the consensus forecast of analysts surveyed by Thomson Financial.

Di Valerio expects software sales "will remain steady" through the current quarter despite market uncertainties.

Server sales carried the quarter. They grew 12 percent to $2.4 billion, their 11th consecutive quarter of double-digit growth.

Windows and Office sales grew 2 percent. Sales of client operating systems totaled $3 billion, and productivity software totaled $2.8 billion.

During yesterday's call, several analysts asked why Windows sales grew slower than overall PC sales.

Curt Anderson, investor-relations general manager, said standalone retail sales of Windows and corporate licensing of the system both fell more than expected.

Microsoft expects such sales will keep falling through the current quarter.

One factor is Windows XP has been on the market nearly four years, and a new version of Windows, code-named Longhorn, is due next year.

To boost consumer interest in Windows, Microsoft is spending more than $200 million on an advertising campaign that began last week.

Businesses may also renew contracts after seeing test versions of Longhorn shipping in summer so that they'll be in line for an upgrade when the operating software is released in full.

"We're hopeful that as customers get more and more clarity around Longhorn, both in ship date and the feature set, that customers will get enthusiastic and will come back into the volume-licensing component of the business," Anderson said.

Other divisions at Microsoft posted mixed results.

Software for phones and mobile devices sold well, increasing 31 percent to $80 million.

Entertainment and home-product sales grew 12 percent, including a 13 percent rise in Xbox sales, and midsize business systems grew 3 percent.

Microsoft reported much lower earnings on interest and investments, since it reduced its cash holdings by $32.6 billion with a special dividend last year.

The coffers are refilling, however. Even after spending $2.4 billion buying back its stock during the quarter, Microsoft had $37.6 billion on hand March 31.

Microsoft expects sales to grow 9 to 11 percent in its next fiscal year, ending June 30, 2006.

The forecast released yesterday predicts 2006 sales of $43.3 billion to $44.1 billion and operating profit of $18.3 billion to $18.9 billion. Earnings per share are expected to be $1.26 to $1.30.

"People are going to be a little bit concerned about the revenue number for this quarter, but the guidance looks pretty good," said analyst Jonathan Rudy at Standard & Poor's in New York.

During regular trading yesterday, Microsoft stock fell 54 cents to $24.45, near its 52-week low of $23.82. The company's results were released after markets closed.

It was the most active stock in after-hours trading, first dropping, then rising to $24.63.

Munster said the results indicate Microsoft is doing fine and heading into "a massive upgrade cycle a year and a half from now, and you want to own it then."

When should investors lasso the steer?

"If you're an investor you want it now because you know it's coming," Munster said. "If you're trying to time it out, you might wait a couple of quarters."

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

Copyright © 2005 The Seattle Times Company

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