Amid tech despair, Microsoft earnings a ray of hope - Stub Files

Computer Technology Review, August, 2002 by Joshua Piven

With virtually the entire high-tech industry in an earnings slump, in July, Microsoft injected some much-needed relief with strong earnings and revenues, although the company's numbers were below analysts' forecasts--and its shares were punished as a result. Company execs continue to have a positive outlook, however, and a research firm indicates that the software giant is preparing to move into a new hardware market in the fall.

Redmond didn't exactly have to stretch to surpass last year's dismal same-quarter earnings, which came in at a measly $65 million, or 1 cent a share, in 2001. For the quarter that ended June 30, 2002, Microsoft reported profits of $1.53 billion (28 cents per share) on revenue of $7.24 billion. But while the numbers sound good, analysts polled by Thomson Financial/First Call were looking for better: earnings of 42 cents per share for the quarter. For the fiscal year, Microsoft announced profits of $7.83 billion, or $1.41 a share, compared to $7.35 billion ($1.32 a share) last year.

While the software giant indicated that revenue from sales of Windows XP, XP server edition, and Xbox grew, the picture is not entirely rosy. Like many companies, Microsoft has been burned badly by the telecom slump, with its investments plunging nearly $9 billion in fiscal 2001 and 2002. Still, for a company with nearly $40 billion in capital reserves the loss, while significant, was not a major blow. Incidentally, Bill Gates indicated that the company's security initiative cost Redmond about $100 million.

What does the rest of the year hold for Microsoft, technologically speaking? According to analysts at In-Stat/MDR, the company is preparing to make a major foray into the home networking market, with a slew of new hardware and software products expected to be announced before the holiday season. Mike Wolf, director of enterprise and residential communications at In-Stat, says that Redmond is readying both wireless and wireline residential networking gear, as well as software for auto-configuring broadband connections and intelligent troubleshooting tools. The home-networking market, while growing, is still small: Projections are for about $2 billion in sales in 2002, according to Wolf. But competition is intense, and prices are falling fast. Why is Microsoft bothering, with virtually no chance that sales in this market will help the bottom line?

This development, Wolf feels, is part of a larger Microsoft strategy to grow the "connected home" at a faster pace, thereby increasing demand for Redmond's newest software products such as Windows XP Tablet, Mira, PocketPC, and its gaming OS. It is in these products, and not in the stagnant PC market, that the success or failure of Microsoft will be written. Consider it an investment in the future.