Microsoft Quarterly Results: Revenues Up But So Are Legal Costs

Late last week, Microsoft released its earnings for the quarter that ended March 31, posting record revenues of $9.18 billion. But Microsoft's earnings were down almost $800 million to $1.32 billion, thanks largely to a series of one-time legal payments that included a $1.9 billion payout to Sun Microsystems and a $603 million fine to the European Union (EU). On Friday, Microsoft's results led a tech market rally, however, with Microsoft's stock surging 5 percent to $27.20.
"It was a great quarter for us," Chief Financial Officer (CFO) John Connors said. "We're pleased to report good results across the board. Every one of our businesses came in where expected, if not better." Indeed, even the previously lackluster business units responsible for MSN and the Xbox reported huge gains and positive earnings. Xbox sales were up 30 percent in the quarter, thanks largely to a $30 price cut. And MSN's online ad revenue jumped 43 percent in the quarter, rivaling the ad earnings of Yahoo!--its main competitor.
Microsoft's historically strong business units also experienced strong growth; revenues from the product groups responsible for Windows, Windows Server, and Microsoft Office products grew 17 percent. The Client Group (Windows products) brought in $2.9 billion for the quarter; the Server and Tools Group (Windows Server, Microsoft Exchange, and Visual Studio products) hit $2.2 billion; and the Information Worker Group (Office products) hit $2.3 billion in sales for the quarter. Other businesses did well, too. Mobile and Embedded Devices jumped to $61 million in sales, and Microsoft Business Solutions (formerly Great Plains) hit $153 million.
Looking forward, Microsoft gave analysts its standard conservative forecast, warning that fiscal 2005, which starts July 1, won't be as "robust" as the previous year, thanks to a weaker dollar and the way the company realizes profits from long-term contracts. Nevertheless, Connors said that PC unit growth will be "in the single digits," a hopeful sign for people who are anticipating the end of the tech slump. Certainly, Microsoft's earnings will be dramatically affected in a positive way if the company can put its many legal battles behind it. "We have worked hard to clear up a substantial amount of our legal exposure--Time Warner, Sun, and all but a handful of the state class-action suits," Connors said. "Tremendous progress has been made. We are still on track to be able to share more details by the financial analysts meeting this July." The company reported its cash and short-term investments hoard now totals $56.4 billion, up from $53 billion at the end of 2003.

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