Microsoft earnings off 42 percent, but still beat market expectations

Associated Press

SEATTLE — Microsoft Corp., struggling with a much-weakened market for personal computers and hurt by losses from investments, saw earnings drop by 42 percent in its fiscal first quarter, but still managed to beat Wall Street’s reduced expectations.

The software giant warned, however, that second-quarter and full-year earnings results would fall shy of analysts’ projections.

For the three months ended Sept. 30, Microsoft earned $1.28 billion, or 23 cents a share, compared with $2.21 billion, or 40 cents a share, in the year-ago period.

The results include a hefty $1.24 billion charge, or 20 cents a share, related to investment losses, primarily in telecommunications. Excluding the investment loss, Microsoft earned 43 cents a share.

Analysts polled by Thomson Financial/First Call had forecast earnings of 39 cents a share — a figure already reduced after the company warned it would not meet analysts’ original expectations due to slumping PC sales.

Microsoft chief financial officer John Connors said the company did not fully realize the extent of its losses until earlier this week, and therefore did not provide prior guidance that it would record the loss.

Microsoft, with its considerable cash reserves, does not expect the losses to affect the company’s investment in research and development, marketing or other investments, Connors said.

Revenue was 6 percent higher, at $6.13 billion, than revenue of $5.77 billion in the year-ago quarter.

The Redmond company is pinning its hopes on the new desktop operating system Windows XP, due out next week, to boost performance in the fiscal second quarter.

However, Microsoft said second-quarter revenue would come in between $7.1 billion and $7.3 billion — at the low end of the $7.3 billion expected by analysts. Meanwhile, second-quarter earnings are now expected to come in between 49 and 50 cents a share, Microsoft said, below the 51 cents analysts were predicting.

Connors said the company’s outlook was based on its prediction that PC sales will be flat, or perhaps even decrease by 2 percent, over the company’s fiscal year ending in June. That means Windows XP sales are not expected to be strong immediately.

"We’re anticipating that Windows XP will be a very successful product both from a customer satisfaction standpoint and from a financial standpoint — for the long term," Connors said.

The company is also counting on its new game console, Xbox, to boost revenue in the coming quarter. But Connors conceded that the game console division will not turn a profit this year.

"We’re anticipating that fiscal 2002 is an investment year for Xbox," he said.

Shares in Microsoft were up 72 cents to close at $56.75 in trading Thursday on the Nasdaq Stock Market. In after-hours trading, shares were up 78 cents to $57.53.