Microsoft posts record Q2 revenue

Citing strength across its business, Microsoft Corp. on Thursday reported record revenue for its second fiscal quarter that beat its own guidance as well as Wall Street's expectations.

In the final three months of 2004, Microsoft recorded revenue of US$10.82 billion, up 7 percent from $10.15 billion in the year-ago period, the company said in a statement. Net income for the quarter amounted to $3.46 billion, up from $1.55 billion in the year-earlier period, Microsoft said. Last year's second fiscal quarter included an especially large charge from a program that allowed employees to sell stock options that were priced higher than Microsoft's stock at the time.

Earnings per share for the quarter were $0.32, including expenses for stock-based employee compensation, the Redmond, Washington-based company said.

Microsoft surpassed its own forecast, given in October, for revenue between $10.3 billion and $10.5 billion and earnings per share of $0.28. Analysts had expected Microsoft revenue to be $10.55 billion, according to a consensus estimate from Thomson First Call.

While both its consumer and business segments performed well, Microsoft highlighted its Home and Entertainment segment in its earnings release. The group, benefiting from strong sales of the Xbox game console and Halo 2 game, posted its first profitable quarter in the final quarter of 2004, Microsoft said.

Still, while Home and Entertainment was profitable in the second fiscal quarter, it will lose money for the remainder of the year, Microsoft Chief Financial Officer John Connors said on a conference call with financial analysts. The goal for the group is to reach sustained profitability sometime in Microsoft's fiscal year 2007, he said.

Microsoft upped its earnings and revenue forecast for its full 2005 financial year, which ends June 30. The software maker now expects earnings per share to come out between $1.09 and $1.11 and revenue to be between $39.8 billion and $40 billion. In October the forecast was for full-year earnings per share between $1.07 and $1.09 and revenue between $38.9 billion and $39.2 billion.

For its third fiscal 2005 quarter, which ends March 31, Microsoft forecasts revenue between $9.7 billion and $9.8 billion. Earnings per share are expected to be $0.27 or $0.28, including stock-based compensation expense, the company said.

"IT and corporate spending was healthy during this (second) quarter and we expect that to continue for the rest of the fiscal year," Connors said.

Microsoft's growth in the quarter was driven primarily by growth in sales of the Windows operating system on server and client systems as well as other server products, the company said in a regulatory filing with the U.S. Securities and Exchange Commission.

Revenue at the Server and Tools group, responsible for Microsoft's server products and developer tools, jumped 18 percent to $2.52 billion in the quarter from $2.15 billion in the year-earlier period. At the Windows Client group, revenue was up 5 percent to $3.22 billion from $3.06 billion.

"The world is buying a heck of a lot of servers," Connors said. "We expect the Windows platform to grow faster than the overall server segment, just as it has for the past few years."

Microsoft is slightly raising its PC shipment growth forecast to between 9 percent and 11 percent for its fiscal year 2005 and is maintaining its server market growth forecast at 13 percent to 15 percent, Connors said.

Revenue at the Information Worker group, responsible for Office, dropped 3 percent. In 2003's second fiscal quarter, Microsoft introduced Office 2003, which resulted in a very successful quarter, the company said in the filing.

Microsoft's Mobile and Embedded Devices group narrowed its operating loss as it increased sales and benefited from lower expenses for stock-based employee compensation. The group's second quarter operating loss stood at $4 million, compared with $110 million in the year-earlier period.

MSN recorded another profitable quarter with an operating profit of $130 million on revenue of $588 million.

As a result of Microsoft's $32.64 billion dividend payout in December, the company's cash hoard has shrunk to $34.5 billion as of Dec. 31.

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