Microsoft profit rises to $3 billion

Times Staff Writer

Microsoft Corp.'s profit climbed 7% in the fiscal fourth quarter even after being hammered by a $1-billion charge to fix defective Xbox game consoles.

But the world’s largest software company, in reporting earnings Thursday, gave modest projections for sales of its new Vista operating system, raising concerns about where Microsoft will be getting its most profitable growth in the future.

“It’s reverting back to historical trend lines, which suggests that we’re not going to see a material bump in revenue” from the long-awaited system for running computers that went into wide release in January, Lehman Bros. analyst Israel Hernandez said.

Overall profit in the three months through June 30 rose to $3 billion, or 31 cents a share, from $2.8 billion, or 28 cents, a year earlier. Revenue increased 13% to $13.4 billion.


In the fiscal year just ended, Microsoft reported profit of $14.1 billion, or $1.42 a share, up from $12.6 billion, or $1.20.

Microsoft forecast that all of its major divisions would show revenue increases of about 10% or more in the fiscal year that began three weeks ago.

But the largest unit by sales, the one that sells personal operating systems, was on the low end, with projected revenue gains of 9% to 10%.

During a conference call with analysts, Microsoft Chief Financial Officer Chris Liddell said the company had recently lowered its expectations for the number of businesses and consumers choosing Vista over the previous operating system, Windows XP.


Partly because more computer programs work on XP than Vista, Microsoft now thinks only 78% of Windows computer buyers will pick Vista this year, instead of 85%.

That reduction helped fuel a debate about where Microsoft is headed, Sanford C. Bernstein & Co. analyst Charles Di Bona said.

“There’s a controversy here, and it’s about whether Vista is a last hurrah or if there’s something big after that,” Di Bona said.

Shares of Microsoft rose 59 cents, or 1.9%, to $31.51 before the news and dropped 61 cents to $30.90 in after-hours trading.


In the meantime, Microsoft is continuing to invest heavily in money-losing divisions that support gaming and online services.

Losses on those two divisions combined exceed $1.4 billion in the quarter, more than double the figure from a year earlier and enough to wipe out half of Microsoft’s profit from selling operating systems.

Most of the recent loss stems from the $1.06-billion charge to fix malfunctioning consoles, extend warranty coverage and write down inventory.

Xbox shipments fell to 700,000 in the quarter from 1.8 million a year earlier.


At its annual conference for analysts next week, Microsoft will spell out more of its long-term plans. Lehman Bros. analyst Hernandez said he expected to hear about a wide range of initiatives rather than a dramatic change in emphasis.

“They need to prepare and invest,” he said. “They’re seeing increasing competition on a lot of different flanks.”