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Microsoft posts higher earnings, splits stock

Microsoft has announced a revenue increase of 10 per cent in its second fiscal quarter to $US8.54 billion, a fraction less than analysts had been expecting but still higher than any quarter in its history. It has also announced a two-for-one stock split and an annual dividend for its shareholders.

Net income came in at $US2.55 billion for the period ending December 31, including a $US282 million charge for investment impairments and a $US126 million credit related to a favorable tax court ruling, the company said. That was up from net income of $US2.28 billion in the prior year's second quarter, Microsoft said in a statement.

The company characterised its results as "solid" in every business, but also warned that it doesn't expect global IT spending to pick up any time soon.

"We're pleased to deliver solid results in a challenging global economic environment," Microsoft chief financial officer, John Connors, said. "Corporate IT spending continues to be tepid, but we were delighted to see our server platforms doing well despite that weakness."

Revenue from its server group increased 12 percent from a year earlier to $1.76 billion, including 40 per cent growth for Microsoft's SQL Server 2000 database, the company said. Revenue also climbed from its home and entertainment division, which makes the Xbox gaming console, and its knowledge worker group, which makes applications including Microsoft Office. MSN also had a strong quarter with online advertising up 40 per cent.

In fact, the only one of Microsoft's seven business divisions to have a decline in revenue was its client group, the largest producer of revenue, which reported $US2.54 billion in sales, down from $US2.56 billion a year earlier. The group makes the company's desktop Windows operating systems.

"Our view continues to be that there has not been much change in the health of the PC ecosystem and that things are pretty soft," Connors said, adding that the company expected PC shipments to grow in the low single digits for the full year - lower than some industry analysts had predicted.

Microsoft has sold eight million Xbox consoles worldwide, more than half of which were sold in North America. It expects to have sold more than 9 million Xboxes by the end of the fiscal year. About 250,000 customers had signed up for Xbox Live, its online gaming service, since it debuted in November, the company said.

Microsoft's revenue continued to benefit from Licensing 6, an annuity program in which customers pay for their software over the course of two-to-three-year contracts. Microsoft initially books the payments as unearned revenue and then realises the money over the life of the contracts. It accounted for about 22 per cent of its second quarter revenue, Connors said.

Operating income came in at $US3.26 billion including a charge of $US210 million, which is what Microsoft estimates it will cost to cover state antitrust and unfair competition lawsuits.

Diluted earnings per share increased to $US0.47, including a $US0.03 charge related to Microsoft's estimate of the cost of class action lawsuits, a $US0.05 charge for investment impairments, and a one-time benefit of $US0.02 for the tax court ruling noted above. That compared to diluted earnings per share of $US0.41 a year earlier, which included an $US0.08 charge related to estimated class action lawsuit costs, Microsoft said.

The revenue figure of $8.54 billion compared with $7.74 billion in the same quarter a year earlier. Analysts had been expecting revenue of $8.59 billion, according to a poll by First Call/ Thomson Financial.

Microsoft also announced an annual dividend for shareholders and said its board has approved a two-for-one stock split. The dividend of $0.16 per share (pre-split) is payable on March 7 to shareholders of record on February 21. As a result of the split, shareholders will receive an additional share for each share they hold on January 27, the company said.

Declaring a dividend shows the board's confidence in Microsoft's long-term growth opportunities and financial strength, Connors said. He also acknowledged several risk factors that investors should be aware of, including the threat posed by the Linux operating system.

"Linux continues to be a threat to our server business. The ramifications of free software to our business model should be obvious to everybody," he said.

The company ended the quarter with cash and short-term investments totalling $43.4 billion, up from $38.7 billion at the end of the June quarter six months earlier.

Ahead of the earnings release, Microsoft's (MSFT) shares on the Nasdaq closed at $55.46, down $0.81 on the day. A fall of 1.44 per cent.