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Filter - Cynthia L. Webb
Microsoft, Amazon Go up Against the Wall St.

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_____About Filter_____
Filter looks at the day's top technology news through snapshots and analysis of what the world's media outlets are covering. Washingtonpost.com's new Mon.-Fri. feature is penned by technology reporter Cynthia L. Webb. If a technology story breaks, a company falters or triumphs, or there's a new trend in technology, Filter wants you to know about it.

_____Filter Archive_____
Democrats Get Wired in Boston (washingtonpost.com, Jul 26, 2004)
EBay Wins a Beating (washingtonpost.com, Jul 22, 2004)
Microsoft Gives Back, Grows up (washingtonpost.com, Jul 21, 2004)
We Built This City on Spam (washingtonpost.com, Jul 20, 2004)
VoIP: The Next Household Word? (washingtonpost.com, Jul 19, 2004)
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By Cynthia L. Webb
washingtonpost.com Staff Writer
Friday, July 23, 2004; 10:00 AM

Several high-profile technology companies have discovered during the past week that Wall Street's attitude toward their earnings isn't "What have you done for me lately," but "What will you do for me next?" The latest tech giants to get this unvarnished truth? Microsoft and Amazon.com.

Microsoft reported an 81 percent rise in profit and a 15 percent surge in revenue, but its financial outlook included in its fourth-quarter results didn't win much Street credit. The company's profit also is expected to dip with its plan to dole out a large chunk of its cash holdings. Microsoft shares were down slightly at the start of the trading day, mirroring a fall in after-hours trading.

Despite the cool reception, the New York Times said Microsoft's earnings and sales growth show "that it is one of the winners in the uneven recovery that the technology sector is experiencing." Microsoft earned a whopping $2.7 billion (25 cents a share) on revenue of $9.3 billion, compared to net income of $1.5 billion (14 cents per share) on $8.1 billion in revenue in the same period a year ago. Microsoft chief financial officer John Connors put the growth in perspective. "In this year, we grew by nearly $4.7 billion, or almost the equivalent of two eBays or two Yahoos," Connors said, according to the Times. "In our books, that's considered a growth company."

So why aren't investors doing cartwheels? The Associated Press explained that "the company still just missed analysts' expectations. The software company also slightly raised its revenue expectations for its coming fiscal year, which ends in June 2005, but decreased its earnings per share projections to account for a planned one-time dividend. Analysts said that may cause short-term stress but should not affect the company's core business in the long term." Meanwhile, the Los Angeles Times reported this: "Although it raised sales projections for the year ahead by $600 million to $38.6 billion, Microsoft lowered its profit forecast to a range of $1.05 to $1.08 a share. In April, it had projected $1.16 to $1.18." Corporate controller Scott Di Valerio told the Times that "the growth rate is down a little bit, primarily due to the fact that we have lower investment income."
The New York Times: Microsoft Reports Strong Sales Increases For Quarter and Year (Registration required)
Associated Press via The Washington Post: Microsoft Earnings Surge In Fiscal 4Q (Registration required)
Los Angeles Times: Microsoft Foresees Less Profit In Wake of Payout (Registration required)
Microsoft earnings Webcast

Some analysts took in the bigger picture. "Microsoft is really clipping along nicely, not suffering like other software companies," Charles di Bona, an analyst at Sanford C. Bernstein & Co., told the New York Times. "Yes, its guidance is low for this year, but I suspect there is room to run here, just as there has been in the past." Jonathan Geurkink at Ragen MacKenzie in Seattle told the Seattle Times: "So much of software, at least enterprise software, has done really pretty poorly. Set against that, Microsoft really looked pretty solid."

And the Wall Street Journal essentially gave Microsoft's earnings a thumbs up. "Microsoft's results showed the underlying strength of its operations and added weight to recent signs that the biggest software makers are growing stronger as their industry matures and as business buyers try to consolidate their spending with fewer suppliers. Yesterday, Germany's SAP AG, the world's third-largest software maker behind Microsoft and Oracle Corp., posted a 14% jump in its net profit on the strength of U.S. sales. Those results buck surprise profit warnings earlier this month from a host of other software makers, including PeopleSoft Inc. and Veritas Software Corp., who said customers were delaying purchases," the newspaper said.

Microsoft is still smarting from news it announced earlier this week to award $3 a share in a $32 billion one-time dividend and to buy back $30 billion in stock. The company "announced its results after the stock market closed. In after-hours activity, the stock fell about 60 cents to $28.26. The fall was cushioned by the announcement earlier this week about the $3-a-share dividend," The Washington Post reported. The Post cited remarks Microsoft's Connors made during a conference call. "Connors said earnings in fiscal 2005 would be lower than previously projected due to the $3-a-share dividend, which will cost the company more than $32 billion," the paper said. "Microsoft has about $60 billion in cash and has resolved many legal issues that it had faced, making it possible for the company to satisfy investors' clamoring for it to do something with the enormous cash pile. Still, while Microsoft continues to dominate numerous computer segments, including the operating systems that run personal computers, sales growth has slowed as the company has become larger."
The Seattle Times: Microsoft Posts Strong Earnings, But Sees Slowdown
The Wall Street Journal: Microsoft Posts 81 Percent Profit Increase (Subscription required)
The Washington Post: Microsoft's 4th-Quarter Profit Rose 81% (Registration required)

The Financial Times said "disappointment about the effect on its future profits from paying out $32bn via a special one-off dividend – which will rob the software giant of interest income – sent its shares down by 5 per cent in after-hours trading. Microsoft also said the yield on its remaining investments would fall next year after it shifted its cash into shorter-dated securities. The company's changing approach to how it manages its investment hoard also held down what would otherwise have been a banner quarter for operating earnings in the three months to the end of June." The Journal gave more details about how Microsoft missed Wall Street's expectations, despite an otherwise stellar quarter. "Microsoft said full-year sales are expected to range between $38.4 billion and $38.8 billion. By comparison, an average of analysts' estimates by Thomson First Call forecast sales of $38.64 billion – in the middle of Microsoft's range. Microsoft's fourth-quarter results included an unexpected loss of $406 million, a $350 million increase from the previous year, on investments used to hedge foreign-currency and interest-rate risks. The company said it had begun shifting some of its portfolio into lower-yield investments that can be quickly turned into cash, as part of its preparation for the dividend payout," the newspaper reported.
Financial Times: Microsoft's Revenues Soar 15 Percent

The company, however, reported gains in a number of its business lines. "Microsoft said each of its seven divisions met or surpassed the company's expectations for the fourth quarter, although three of them remain unprofitable: Microsoft Business Solutions, Home and Entertainment, and Mobile and Embedded Devices. The previously unprofitable MSN Internet division, continuing to benefit from strong advertising revenue, posted operating income of $35 million for the quarter. The division also posted annual operating income of $121 million – its first yearly profit. The Information Worker division, which includes Microsoft Office and related products, posted a 23 percent revenue increase for the quarter," the Seattle Post-Intelligencer reported.
Seattle Post-Intelligencer: Microsoft's Quarterly Results Shoot Up 82%

In The Jungle

Amazon.com, meanwhile, reported a profit for its second quarter, but the company – surprise – failed to meet Wall Street's expectations. "The company reported income of $76 million, or 18 cents a share, for the quarter that ended June 30, compared with a loss of $43 million, or 11 cents a share, for the same three-month period a year earlier. Revenue rose 26 percent to $1.39 billion, helped by increased international sales and the company's free-shipping promotion," the Seattle Post-Intelligencer reported. "Analysts polled by Thomson Financial expected the company to report a profit of 19 cents a share on a pro forma basis, which excludes stock-based compensation and other operating expenses and remeasurements. Amazon.com missed that target by a penny a share. The company also missed analysts' revenue growth projections of 31 percent."
Seattle Post-Intelligencer: Amazon Posts Quarterly Profit

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