Earnings for the Redmond, Washington-based software giant advanced 5% to $3.65bn (35 cents EPS), up from $3.46bn a year ago, The total included a one-time tax benefit of $108m, which boosted shares by a cent.
The earnings forced shares to jump up in after hours trading late Thursday by 1.8% adding an additional 47 cents to the closing price of $26.50. In the past 52 weeks, Microsoft’s shares have traded between $23.82 and $28.85.
Overall revenue for the quarter, while climbing up 9% to $11.84bn (from $10.82bn a year ago), still fell short of the $11.96bn that Wall Street was expecting.
Nevertheless, Microsoft slightly nudged up its fiscal year profit and revenue guidance. The company now expects to earn between $1.28 to $1.31 per share on revenue ranging between $44bn to $44.5bn.
The company also predicted a profit of 32 cents to 33 cents a share on revenue of $10.9bn to $11.2bn for the current quarter.
In a conference call with analysts yesterday, Microsoft CFO Chris Lidell singled out strong sales of the Xbox 360 video game console (with 1.5 million units shipped since its launch last November), a warm reception for its latest SQL Server 2005 platform (also launched November) and continued growth of its flagship Windows operating systems as the key drivers of the business.
Lidell said that all these products exceeded expectations in the quarter.
We’re happy with the overall financial performance, he said.
Lidell added the company is on track to sell between 4.5 million and 5.5 million Xboxes by the end of the fiscal year in June. The product was a hot-ticket item during the recent holiday period.
While most of Microsoft’s diverse business units showed some profit, some analysts said that the overall numbers glossed over some disappointments, notably the $239m loss that Microsoft’s home and entertainment division (which includes Xbox) during the quarter. Last year this division earned $55m. The loss was despite a 13% rise in revenue to $1.56bn. This is because Microsoft in fact loses money each time it sells an Xbox console. Its goal is to break even.
Elsewhere Microsoft’s MSN Internet unit also saw a disappointing fall in earnings to $58m, from $130m in the same year-ago quarter. Sales also fell 2.1% to $593m. Liddell attributed the slip to dropping demand for narrowband Internet connections in favor of faster broadband services.
One encouraging note was Microsoft’s small business unit, Microsoft Business Solutions, which moved into the black for the first time since Microsoft decided to split itself up into seven main business units. Microsoft’s Mobile and Embedded Devices units also posted their first ever profitable quarters as well.
Other parts of Microsoft’s core software businesses also saw steady growth.
The division in charge of tools and servers saw revenue rise 14% to $2.91bn.
The company’s client division, which sells Windows, posted revenue of $3.46bn, up 8.3%, and returned a profit of $2.63bn. And Office product sales even climbed 5.5% to $2.98bn.
However lingering concerns about softening demand for personal computers seem have taken the edge off long-term investor confidence. Truth be told Microsoft’s stock has been stuck in limbo between the $24 to $28 range for some time despite revenue growth and strong cash flows. Looking at the dividends, its hard to believe that Microsoft’s stock has more or less underperformed against every major stock indices since 2003.
Yet some analysts believe that 2006 could in fact be a breakout year for the company. Why? Because its is in the midst of rolling out its largest line up of new products in some time.
Clearly Microsoft is banking on several critical product launches to drive its numbers over the next year. The company continues to see solid adoption for its latest SQL Server 2005 business and is prepping to launch an updated Vista version of its Windows operating system in the second half of this year and is also working to overhaul its ubiquitous Office personal productivity suite as well.
Microsoft’s quarterly earnings came in on the same day that software giant announced its Live Lab project to speed up the launch of a series of Internet product launches planned for this year.
Gary Flake, a Microsoft technical fellow will head up the Lab which he said would be the pre-eminent applied research laboratory for Internet technologies and will include researchers from Microsoft’s MSN and core Research divisions.
The company also announced the creation of two new Search Labs located at its headquarters in Redmond, Washington and Silicon Valley campus in Mountain View, California.
