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Microsoft Stock Rises on Earns News

October 18, 2002

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SEATTLE (AP) _ Shares of Microsoft Corp. rose 3.5 percent Friday after the software giant reported it more than doubled its third quarter profits by increasing sales under a new licensing plan and paring its investment losses.

The Redmond-based company posted a profit Thursday of $2.73 billion, or 50 cents a share, for the three months ended Sept. 30. That compared with net income of $1.28 billion, or 23 cents a share, for the same period a year ago.

The results included one-time charges of $291 million, or 5 cents a share, related to weakness in Microsoft’s investments. A year earlier, Microsoft wrote down $1.2 billion on investments.

Microsoft’s fiscal first-quarter revenue totaled $7.75 billion, up 27 percent from $6.1 billion in sales a year ago.

The company surpassed Wall Street’s expectations. Analysts surveyed by Thomson First Call had a consensus estimate of 43 cents a share on revenue of $7.1 billion.

``It was a blowout,″ said Scott McAdams, chief executive of Seattle-based investment research firm McAdams Wright Ragen.

In morning trading Friday on the Nasdaq Stock Market, Microsoft shares gained $1.76 to $52.53.

Microsoft cited a higher-than-expected enrollment in new, subscription-based licensing plans that require companies to sign multiyear agreements and pay annual fees in return for rights to software upgrades. The new plans also eliminate many discounts companies received when they upgraded.

``We haven’t seen a quarter like this in years,″ McAdams said, attributing the strong results to the deadline for companies to adopt the new licensing agreements. But with the deadline past, coming quarters probably won’t see that strength, he said.

``The bad news is it may not be sustainable,″ McAdams said.

Many businesses and government agencies complained about the new licensing programs, saying they were being forced to subscribe or face significantly higher prices when they were ready to upgrade.

``We would go back and change some things about how we implemented the program, in hindsight,″ said Chief Financial Officer John Connors. ``Anybody that’s a dissatisfied customer is a concern.″

The company also announced that Windows XP sales have reached 67 million units since the new operating system was launched in October 2001. It also saw strong sales increases on MSN Internet access service, as well as a 14 percent jump in sales for its server software and related products.

For its second quarter, which ends Dec. 31, Microsoft is gearing up for a number of launches, including MSN 8, the latest redesign of its Internet browser and access service, and Xbox Live, an online video-game service for customers with Microsoft’s Xbox game consoles. Both divisions are losing money, but Connors said Microsoft will spend millions to market both during the all-important holiday season.

The coming quarter will be an important one for Microsoft as Xbox Live makes its debut, said Jonathan Geurkink, vice president of investment research firm Ragen MacKenzie.

``I think that it had been a little bit disappointing how (Xbox) has done competitively against (Sony Corp.’s) Playstation,″ Geurkink said.

For the second quarter, Microsoft said it expects revenue of between $8.5 billion and $8.6 billion, with earnings of 45 cents or 46 cents a share. For the full year, Microsoft said revenue should range from $32.2 billion to $32.6 billion and fuel earnings of $1.89 to $1.95 per share.


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