Microsoft Reports Strong Fiscal 2004 Results

by Alex Woodie

Microsoft last week reported solid, double-digit revenue growth for its fourth quarter and fiscal year 2004. Strong demand for Windows Server System led to a 20 percent increase in its Tools and Technology division, while a modest rebound in PC sales helped Windows XP licenses. Overall, the company finished the year with a record $36.8 billion in revenues, with a little more than $8 billion dropping through to the bottom line.

For its fourth quarter, which ended June 30, Microsoft reported $9.3 billion in total revenue, a 15 percent increase from its fourth quarter fiscal 2003, when it brought in $8.1 billion in sales. The company's net income soared 81 percent, to $2.7 billion, up from $1.5 billion a year ago, due in part to a 6 percent reduction in operating expenses, from $6.5 billion to $6.2 billion. For the year, the company had total revenue of $36.8 billion, a 14 percent increase over the $32.2 billion reported last year. Net income for fiscal year 2004 was $8.17 billion. Microsoft's diluted earnings (after taxes, charges, and such) were $0.75 per share.

While four of Microsoft's seven divisions lost money in the fourth fiscal quarter, all of them grew in terms of revenue, and the company says that each met or exceeded growth expectations. The three divisions that make up about 80 percent of the revenue--Client, which does PC operating systems; Information Worker, which sells Office; and Server and Tools, which sells the Windows Server System and development tools--accounted for practically all of Microsoft's profit.

In the fourth quarter, revenues for the company's Client business unit grew 9 percent year-over-year, to $2.8 billion. This division was responsible for $2 billion in operating income during the fourth quarter, and Microsoft expects it to get better as the entirety of the PC market remains healthy, with a 12 percent year-over-year increase. (Microsoft did not say where it got these numbers, but they are probably internal estimates based on data from the usual suspects in market research, Gartner and IDC.)

The Server and Tools division turned in another impressive quarter, with 20 percent year-over-year growth, to $2.3 billion. Sales of each of the key components of Microsoft's Windows Server System--Windows Server 2003, SQL Server, and Exchange--each grew by 20 percent or more, signifying their acceptance in the marketplace. This division was responsible for about $570 million in operating income for the quarter. This number is also expected to improve as Windows-based server shipments continue to outgrow the overall server market.

Along with Client, the Information Worker division is a powerful profit engine for Microsoft. This division brought in $2.9 billion in revenue last quarter, a 23 percent year-over-year increase, while accounting for nearly $2 billion in operating income. Strong demand for Office 2003, as well as Small Business and Student and Teacher editions of its products, boosted this division last quarter, Microsoft says.

Microsoft says there was strong demand for the Navision ERP suite, and that it added more than 7,500 new Microsoft Business Solutions customers during the fourth quarter. Overall, revenue for the MBS division increased 9 percent during the quarter, to $196 million, but it still lost $42 million.

Despite a 34 percent drop in the number of subscribers to its Internet access service, the company succeeded in growing revenues in the MSN division, the only other division besides Client, Information Worker, and Server and Tools to turn a profit, largely due to an increase in search and display advertising. Overall, the MSN business accounted for $588 million in revenue for the quarter. In the Home and Entertainment division, strong demand for the Xbox gaming console contributed to a 3 percent revenue growth, to $499 million, while a 64 percent increase in licenses for PocketPC products drove an impressive 59 percent year-over-year revenue increase, to $70 million for the quarter, in the Mobile and Embedded Devices division.

Microsoft's much vaunted R&D spending actually dropped by 1 percent last quarter, "primarily due to lower product development and internal computer lab costs," the software maker said. In his e-mail to employees and business partners several weeks ago, CEO Steve Ballmer said the company needed to cut $1 billion in expenses over the next year.

As expected, Microsoft's hoard of cash and short-term investments topped $60 billion at the end of its fiscal year. That $60.6 billion pile, which has been growing at a rate of about $1 billion per month, will not be nearly as large next year, as a result of the extraordinary move Microsoft made to redistribute that wealth directly to its shareholders (see accompanying story "Does Dividend Spell the End of Innovation for Microsoft?").

Looking forward, Microsoft says to expect revenues between $8.9 billion and $9 billion for the first quarter of 2005, and operating income of around $3.7 billion to $3.8 billion. For fiscal year 2005, the company is projecting total revenues in the range of $38.4 billion to $38.8 billion, and operating income of $16.1 billion to $16.4 billion. (Those are pretty tight ranges, which is an indication of how well Microsoft can peg its future fortunes.) The company indicated it could hit these numbers, depending on certain uncontrollable market conditions, such as the growing popularity of Linux and open source software, foreign exchange rate fluctuation, and difficulty predicting PC and server demand.