Microsoft Doubles 2Q Profit

The software giant posted a profit of $3.5 billion, or 32 cents a share, compared to 14 cents per share, and $1.55 billion in the same quarter last year. Analysts polled by Thomson First Call had expected 33 cents earnings a share.

Microsoft originally had forecast earnings per share of 28 cents, but issued rosier estimates in December.

Revenue for the Redmond, Wash., company's server and tools division grew 18 percent, to $2.5 billion, propelled by increased hardware sales for Microsoft Windows server and strong sales of SQL Server and Exchange. The Home and Entertainment software division grew 11 percent to $1.4 billion and pulled its first profitable quarter ever, said Microsoft Chief Financial Officer John Connors.

The Windows client business grew 5 percent to $3.2 billion while the company's smallest business division -- the mobile and embedded devices (MED) unit -- posted a 44 percent revenue gain to $91 million, on significant sales of Smartphones.

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Microsoft enjoyed 12 percent growth in OEM licenses, yielding a 10 percent gain in OEM revenues, but that growth was offset by a 16 percent decrease in commercial licensing, Microsoft said.

Revenue in Microsoft's second biggest division, Information Worker, declined by 3 percent, compared with the same quarter last year. That was the quarter Microsoft debuted Office 2003 and took in $181 million in revenue from Upgrade Advantage program. Despite the decline, profit in the division grew more than 10 percent, to $2 billion.

Analysts continue to voice concerns about the company's licensing revenue and renewals. In its financial statement, Microsoft acknowledged that the absence of Upgrade Advantage revenue continues to affect the bottom line. Microsoft earned approximately $7 million and $44 million, respectively, from the Upgrade Advantage programs for the three and six months ended December 31, 2004, compared with $296 million and $674 million for the three and six months ended December 31, 2003, according to Microsoft's balance sheet.

When asked about the bumpy shift to Software Assurance and annuity licensing, Connors said that Software Assurance renewal rates at roughly 30 percent were on the higher end of the scale expected. Combined with "healthy bookings" and deferred revenue up $184 million, the company's financial well-being was assured, he said.

Goldman Sachs said Windows client and Office businesses were slow growing but not as slow as Microsoft forecast. Deferred revenues were up $184 million and the off balance sheet -- licensing deals Microsoft has contracted but not yet billed -- are up $1 billion seqentially, Goldman Sachs said.

Connors noted, for example, that the overall mix of products sales for the quarter were consistent at 30 percent OEM sales, 25 percent annuity licensing, 25 percent license-only sales and the balance from "other businesses."

Yet he acknowledged that Microsoft will invest a good deal in advertising and field power during the second half of its 2005 fiscal year, to grow the Microsoft brand and sign more licensing deals. "They got a lot of orders to get done in the next six months," Connors said.

One LAR that provides licensing services for Microsoft said it was a decent quarter and the overall picture for Microsoft and others seems to be improving.

"This was a period where the water level rose as far as customer interest in infrastructure products," said Harry Zoberman, a vice president at ASAP Software, Buffalo Grove, Ill. "Windows and other servers were growth areas for sure. Bodes real well for the future."