Microsoft beat Wall Street estimates last quarter, increasing sales by 9 percent, but it may not be enough to excite investors hoping for...
Microsoft beat Wall Street estimates last quarter, increasing sales by 9 percent, but it may not be enough to excite investors hoping for a blowout.
Yesterday’s quarterly earnings report also brought mixed news for the Puget Sound region, where Microsoft has an outsized effect on the local economy.
Hiring data also released yesterday show that Microsoft is still growing locally, but at a steadily slower pace. It added about 1,391 jobs in the Seattle area in the past fiscal year, which ended June 30, down from 1,401 the previous year and 1,460 the year before that.
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The company’s bottom line also was helped by its move away from stock options. Microsoft options superheated the region’s economy in the 1990s, but the company stopped issuing them during its 2004 fiscal year. As a result, expenses decreased by $3.3 billion in fiscal 2005, the company said.
Two of Microsoft’s fastest-growing businesses during the quarter were the Xbox and server groups, which saw sales rise 22 percent and 16 percent, respectively.
The company had a fourth-quarter net profit, including legal and tax settlements, of $3.7 billion, or 34 cents a share, compared with a 31-cent estimate among analysts polled by Thomson Financial. A year ago, its net profit was $2.69 billion or 25 cents a share. Sales were $10.16 billion, up from $9.29 billion the year before, a 9.4 percent increase.
In fiscal 2005, profit was $12.25 billion on sales of $39.79 billion. Sales were up 8 percent over 2004, when the company netted $8.17 billion on sales of $36.84 billion.
“2005 turned out to be a much better year than we expected,” said Chris Liddell, the company’s chief financial officer, who started in May.
He also noted that Microsoft distributed a record $44 billion to shareholders through dividends and stock buybacks during the year.
Liddell said sales during the 2006 fiscal year should be even better. Microsoft expects revenue to increase 10 to 12 percent, driven by new products such as the Xbox 360 console and a new SQL database.
New versions of Windows and Office are also coming, but not until late 2006, so their sales will come in Microsoft’s 2007 fiscal year.
In the meantime, the company’s costs are expected to go up as it prepares to launch the products.
The company projects sales of $9.7 billion to $9.8 billion and earnings of 29 cents to 31 cents in the current quarter, the first of fiscal 2006. For the year, it forecasts sales of $43.7 billion to $44.5 billion.
Overall hiring is expected to remain steady next year. As of June 30, the company employed 61,472, up 4,403 from the year before. Of the total, 27,914 are in the Puget Sound area. Liddell said Microsoft will add “about the same” — or 4,000 to 6,000 new employees — in the coming year.
Several analysts said they were pleased but not overwhelmed by the earnings report.
After surprisingly good earnings reports from IBM and Apple Computer and higher-than-expected PC sales, investors may have been expecting more from Microsoft, said Jonathan Rudy at Standard & Poors.
“It was a solid quarter,” he said. “I just think things got carried away this week. It’s just too easy to say, ‘The tech rally’s here and we’re off to the races.’ “
Rudy expected Microsoft to have $10.2 billion in sales, well above the reported $10.16 billion.
“I just figured there would be more upside there — it seems like all the data points were indicating a strong quarter,” he said.
Goldman Sach’s Rick Sherlund thinks Microsoft’s growth rate bottomed out in the third quarter, which ended March 31. With a full pipeline of new products coming out over the next year, he expects the company to return to double-digit growth rates. His firm does investment banking for Microsoft.
“I think that’s the real bull story for Microsoft — the growth is going to be accelerating,” he said.
Sherlund said Microsoft may be in a position to increase its regular dividend, boosting its yield by perhaps 50 percent. He speculated a dividend boost could be announced next week during the company’s annual financial analysts meeting in Redmond.
Microsoft may not see as much growth from PC sales next year, however. The company estimates an 11 to 13 percent rise in its 2005 fiscal year and 14 to 16 percent in the past quarter. Next year it expects PC sales to go up between 7 to 9 percent.
During the past quarter, Windows sales were up 10 percent and Office and other “information worker” product sales grew 3 percent.
Sales of Microsoft Business Solutions small-business products increased 11 percent, but the division continued to lose money.
Sales in the MSN division fell 1 percent during the quarter, affected, in part, by the continuing decline of its dialup Internet access business. Its ad sales jumped 22 percent, however.
The Microsoft division that produces software for phones and other mobile devices boosted sales 39 percent in the quarter.
Earnings in the quarter were reduced by $756 million in antitrust legal settlements, including $626 million paid to IBM.
On the flip side, the company received a one-time $776 million tax benefit by settling an IRS review of its 1997 to 1999 taxes. It also received a $179 million temporary tax benefit from the American Jobs Creation Act of 2004.
Microsoft stock was up 25 cents yesterday, closing at $26.44. But in extended trading — after the earnings report was released — shares dropped to $25.91.
Brier Dudley: 206-515-5687 or email@example.com