Guild Companies--Microsoft and Intel Report Quarterly Gains

Microsoft and Intel last week reported quarterly gains on the financial front, with Intel exceeding analysts' predictions and Microsoft falling short of expectations. Dogged by continuing security issues that kept customers too distracted to buy, Microsoft still pushed up revenues in its first fiscal quarter of 2004 by 6 percent (thanks mostly to consumer, not corporate, spending). Intel attributed its sales growth to demand in Russia, China, and India.

For the quarter ending September 30, 2003, Microsoft posted revenue of $8.22 billion, up from $7.75 billion one year ago. Net profits amounted to $2.61 billion, which computes to 24 cents per share, compared with a profit of $2.04 billion, or 19 cents per share, this time last year. Analysts had been expecting profits in the range of 29 cents for the current quarter.

Other quarterly comparisons based on figures from one year ago include operating income of $3.15 billion, compared with $3.03 billion; net income and diluted earnings per share of $2.61 billion and $0.24 (which included equity compensation expense of approximately $680 million after taxes) or $0.06 per share, compared with $2.04 billion and $0.19 (which included a charge for investment impairments of $291 million after taxes, or $0.03 per share; and an equity compensation expense of approximately $702 million after-taxes, or $0.06 per share). The prior year's operating income, net income, and earnings per share were retroactively adjusted to reflect the adoption of fair value expense accounting for equity-based compensation under SFAS 123.

"While corporate IT spending was slow to improve this quarter, we saw strength across all of our consumer businesses, driving higher-than-expected revenue for the company," said John Connors, chief financial officer at Microsoft in a statement accompanying the results. "Delivering value to our customers with innovative software, like the new Office System, Exchange Server 2003, and Small Business Server, and executing on our plan to better help protect customers from a growing number of security attacks are our top priorities for the rest of the year." If you ask customers, they will probably tell you he has those priorities in the wrong order. Security first; new products later.

Windows Server, SQL Server, and Exchange each logged double-digit revenue growth in the quarter, pushed by customers adopting the enterprise-class versions of Microsoft's programs, officials said. Windows Server 2003 sold more than two times as many licenses as Windows 2000 Server did in the first six months after their respective launches, in February 2001 and April 2003. The company also claims more than 120 million Exchange seats installed, which puts it very close to IBM Lotus Domino's position as the leading messaging solution.

Microsoft said that it was also helped by a better-than-expected market for PC and server sales. Company officials believe a combination of changes in the sales channel program, enterprise spending that was not as robust as hoped for, and the ongoing dilemma related to security issues all played a part in limited gains. Microsoft, especially in recent weeks, has been focusing much of its public relations muscle on future development of improved security and patch management. The company also said that it had double-digit growth in the area of servers and tools, databases, network operating systems, and e-mail servers.

As for the next quarter, ending December 31, here is what Microsoft is predicting (including equity compensation expenses in accordance with SFAS 123):

The same consumer demand for PCs that lifted Microsoft also propelled Intel to quarterly profits that were double those from a year ago. Processor shipments, as well as shipments of chipsets and motherboards, set records. It's been more than 25 years since Intel has realized third-quarter growth this strong, according to chief financial officer Andy Bryant. In the quarter that ended September 30, Intel earned $1.7 billion, or 25 cents per share, compared with $686 million, or 10 cents per share, in the same period last year. Sales rose 20 percent, to $7.8 billion, from $6.5 billion last year. Third-quarter revenue grew 15 percent compared with the second quarter.

The opinion of many analysts is that Intel increased its market share because competitors have not put the pressure on and overall prices remained stable. That may change in the coming quarter, because Advanced Micro Devices now has its Athlon 64 chip in production and has slashed Opteron prices, while Transmeta has launched its Efficeon processor to compete with Intel's Centrino low-voltage, mobile processor.