Server Sales Spur Profit at Microsoft
Supply problems for the new Xbox 360 game console during the holiday season hurt Microsoft Corp.’s revenue, but brisk sales of server software to operate networks boosted the company’s quarterly profit 5.5%.
Microsoft said Thursday that it earned $3.65 billion, or 33 cents a share, in its fiscal second quarter ended Dec. 31, meeting the figure projected by analysts surveyed by Thomson Financial. Microsoft earned $3.46 billion, or 32 cents a share, a year earlier.
Microsoft’s sales rose 9% to $11.8 billion, missing its forecast of $11.9 billion to $12 billion. Analysts had expected an increase to $12 billion.
The company’s server and tools division grew 14% from a year earlier, buoyed by a 20% rise in revenue from its flagship SQL Server data-management product.
Shares of Redmond, Wash.-based Microsoft rose 10 cents to $26.50 prior to the earnings announcement. Microsoft gained an additional 51 cents in after-hours trading.
“It was a good quarter for them,” said Rick Sherlund, an analyst with Goldman Sachs & Co. “ ‘Terrific’ you reserve for Google,” he said, referring to the Internet powerhouse.
Microsoft also accelerated its stock repurchase plan -- buying back more than $7 billion of its shares in the quarter.
“The markets are going to react positively on the amount of shares they bought back,” said Charles J. Di Bona, an analyst with Sanford C. Bernstein & Co.
But analysts said the company must ramp up production rapidly for the Xbox 360. Microsoft has shipped just 1.5 million units of the device since its Nov. 22 introduction, well below its initial expectations.
The company said production would gradually increase, and held to its original target 4.5 million to 5.5 million units by June 30.
“We are right where we want to be,” in part because about half of the Xbox 360 buyers have connected to fee-based online gaming services, compared with about 10% of buyers of the old Xbox, Scott Di Valerio, the company’s chief accounting officer, said in a teleconference.
On average, each Xbox 360 buyer has also purchased four games, he said.
Analysts doubted that the Xbox can maintain its momentum if supply problems persist.
David M. Hilal, an analyst with Friedman, Billings, Ramsey & Co., noted that Microsoft only has a short jump on Sony Corp.’s PS-3 gaming device due out in June.
“They don’t want to miss opportunities just because they can’t stock the shelves,” he said.
MSN, the company’s Internet unit, also lagged. Revenue dropped by 2% as Microsoft began to switch its network over to more-targeted ads. Microsoft said it expected flat revenue for MSN throughout the fiscal year.
“They are trying to improve the relevance of their Web advertising,” said Sherlund, who expects the effort to pay off by the second half of calendar 2006.
Most of the quarter’s growth came from traditional workhorses -- operating systems and application software for personal computers and servers. This was fueled by stronger-than-expected PC unit growth of 14% to 15%, Di Valerio said.
For the first time, six of Microsoft’s seven units reported a profit. Only the home and entertainment division, weighed down by Xbox production problems and promotional costs, lost money.
