Update: Microsoft CFO Says Security Concerns, Channel Reorg Hurt Quarter

For its first fiscal quarter 2004, Microsoft posted revenue of $8.22 billion, up six percent from $7.75 billion it earned for the year-ago period.

For the quarter ending Sept. 30, 2003, the software giant reported a net profit of $2.61 billion, or 24 cents per share, compared with a profit of $2.04 billion, or 19 cents per share, a year earlier. Analysts had expected profits in the 29-cent range. The quarter's numbers include $680 million for after-tax equity compensation.

The quarterly results were affected by better-than-expected take up in the consumer business with strong holiday sell-in of Xboxes, but also dampened because of slow-to-recover corporate IT spending, Microsoft CFO John Connors told analysts and reporters Thursday afternoon.

On the plus side, PC demand was much higher than expected, and server sales were slightly better than expected, Microsoft said.

Once again, Microsoft took pains to stress that security remains its top priority.

The company saw its unearned revenue, much of it relating to multi-year licensing agreements, fall almost a billion dollars sequentially from the June quarter, a fact that the analysts drilled down on.

Connors said several factors hurt the quarter, including an overly optimistic forecast from the last quarter. Corporate IT spending, especially in the enterprise for the September quarter "is not quite what we thought it would be," he noted. He also said that this summer's realignment of the Microsoft Business Solutions channel into the broader "classic" channel also "created a bit of a disruption (See Story.)

But perhaps most importantly, the company was hurt by continued security issues.

"Security concerns diverted the focus of our customers, our sales force, and our channel away from closing new deals," Connors said.

Connors maintained that the company will keep up the effort even if it hurts short-term financial goals. "The most important thing we need to make clear [is] we're doing everything we can to make customers more secure and if we have to eat up sales cycles to do it we'll do so," Connors said.

For the past few weeks, Microsoft executives from CEO Steve Ballmer on down have touted a renewed security thrust, two years into the company's previously announced Trustworthy Computing initiative. They have promised better, more predictable, and easier patch management. Connors said developers will hear more details on the thrust at next week's Professional Developers Conference in Los Angeles.

For the first quarter, sales of servers and tools grew 15 percent compared to last year to $1.87 billion for the quarter. The company said its database, network operating system and e-mail servers all saw double-digit growth.

The earnings news comes just two days after the company's big Office System 2003 christening, and looking forward, the company expects its second fiscal quarter revenue to fall between $9.7 billion and $9.8 billion with operating income ranging from $3.2 billion to $.3.3 billion, including equity compensation expenses of about $1 billion.

Diluted earnings are expected to be around 23 to 24 cents per share.

This summer, the company said it would start expensing stock-based compensation.

For a detailed report on Microsoft's in-process channel program changes, see story.