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Microsoft Profit Up 11%; Forecast Is Mixed

By Jonathan Krim
Washington Post Staff Writer
Friday, October 22, 2004; Page E05

Microsoft Corp.'s quarterly earnings rose 11 percent over the comparable quarter last year, but projections for the current quarter were mixed.

For its fiscal first quarter, which ended Sept. 30, the company announced a profit of $2.9 billion, up from $2.6 billion. Revenue was $9.2 billion, up from $8.2 billion.

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That translated into earnings of 27 cents per share, after a 5-cent-per-share expense as the company continues its transition from awarding stock options to employees to actual stock. Analysts had expected earnings in the range of 30 cents a share, not counting the stock compensation expense.

The company's strongest growth came in sales of server software, which runs networks of computers in businesses and organizations.

But the company said that in the current quarter, it expects revenue of $10.3 billion to $10.5 billion, compared with analysts' estimates of $10.6 billion. With its software running more than 90 percent of the world's personal computers and a growing share of the corporate market, technology companies and investors look to Microsoft for cues on prospects for the sector.

Chief Financial Officer John G. Connors said, "We expect to continue the trend of growing revenue faster than expenses as we work to make each of our businesses more efficient and profitable."

Microsoft has struggled to adjust to being a slower-growth company as the sector matured. The company also faces some of its toughest competition ever from Linux and other open-source operating systems, which are attractive to many business customers because they often are less expensive, are viewed as more secure and allow for more customization by users.

In response, Microsoft has begun to trim its costs while it also pushes into new areas, such as software for smart phones and other mobile devices. For the quarter, the company added $3 billion to its cash hoard, which now contains $64 billion.

The company showed some weakness in its "unearned revenue" category, which is how the company accounts for business customers who have not yet renewed license agreements that are expiring.

Given the increased pressure from open-source competitors, analysts questioned Connors extensively on whether the numbers indicate that customers might be looking to defect, or are at least holding out for discounts from Microsoft.

Connors said that the numbers can be misleading and that renewal deals are simply becoming more complex and thus can take longer to complete.

Overall for fiscal 2005, Connors said, Microsoft is expecting solid growth in all its businesses, including gaming and its efforts to break into the home-entertainment market with its MSN music service.

Connors said Microsoft took note of Google Inc.'s launch last week of a tool that allows computer users to search their computer hard drives with keywords. That has been an anticipated feature of the next version of Windows, code-named Longhorn, expected out in 2006 or 2007.

"We're going to have a great race in search between Google, Microsoft and Yahoo," Connors said. "It's going to be really fun to follow."

Microsoft stock ended regular trading yesterday at $28.56 a share, down 14 cents. It has traded between $24 and $29 a share for the past year. The stock price was down in after-hours trading last night.


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