Legal Costs Cut Into Microsoft Net
Microsoft Corp. on Thursday reported a 38% drop in its fiscal third-quarter profit as legal expenses wiped out the benefits of an unexpected surge in sales of its most important products.
The world’s largest software maker said net income dropped to $1.32 billion, or 12 cents a share, from $2.14 billion, or 20 cents. Sales rose 17% to $9.18 billion, well ahead of earlier projections.
Despite the decline in net income, “it was a stellar quarter. We knocked the cover off the ball,” said Curt Anderson, Microsoft senior director of investor relations. After gaining 50 cents in regular Nasdaq trading to $25.95, Microsoft stock climbed as high as $27.30 after hours.
Net income was cut by a charge of $1.89 billion to settle litigation with Sun Microsystems Inc. and to set aside money for an antitrust fine imposed by the European Commission. Microsoft also spent $501 million for stock-based compensation, which some competitors don’t count against earnings.
Separately, Microsoft spelled out its expected arguments in appealing the European ruling that it violated antitrust laws. In particular, it said the commission had gone beyond the existing law for balancing the benefit to consumers from product enhancements against harm to competitors.
Instead of an equal balance, the company said, the commission insisted that if a competitor was harmed, Microsoft must show that its improvement was “indispensable.”
“The decision opens the door to intrusive regulation of product design,” the company wrote. The full 301-page ruling by the commission was released for the first time earlier in the day.
In discussing the company’s earnings, Microsoft executives said last year’s introduction of new server software for computers running groups of machines helped that division record a 19% increase in sales. Revenue at the division selling programs for word-processing and similar tasks gained 18%, also aided by a recent release.
MSN, Microsoft’s online services, turned in its second profitable quarter as ad sales jumped 43%, and revenue from the Xbox home-entertainment division increased 17% to $530 million.
For the fiscal year’s final quarter, Microsoft predicted net income of 23 cents a share on sales of $8.9 billion to $9 billion.
The future will be less robust. Microsoft warned that revenue growth would slow to about 4% in the fiscal year that begins July 1 as the pace of product introductions falls off. The next overhaul of the PC operating system Windows isn’t expected before 2006.
Microsoft executives said they planned to deal with that lull by cutting costs. Travel has been reduced, deals with vendors have been renegotiated and research and development expenses dropped 9% to $1.54 billion in the latest quarter.
Anderson said next year’s operating expenses would fall if stock compensation was included. As a result, the company projected earnings per share for next year of $1.16 to $1.18 a share, above expectations.
The new revenue guidance may be low, as Microsoft is typically conservative in its predictions, said Sanford C. Bernstein analyst Charles Di Bona.
“What’s interesting is the earnings guidance is pretty strong,” he said. “These guys have not restructured -- they can squeeze some more out of less revenue than people think.”
The Redmond, Wash.-based company said it planned to update investors by the end of July on its plans for a $56-billion mountain of cash and short-term investments.
Many investors have been pushing for a significant increase in the company’s small dividend, now that legal threats have been reduced to the European appeal, a handful of consumer class-action lawsuits and cases filed by such rivals as RealNetworks Inc.
During a conference call with analysts, Chief Financial Officer John Connors all but agreed.
“Tremendous progress has been made,” Connors said. “We have a balance sheet that will allow us to provide significant value to shareholders.”
