Microsoft Revenue Up 9%, Operating Income Hurt by Legal Costs

Microsoft Corp. today announced revenue of $10.16 billion for the quarter ended June 30, 2005, a 9% increase over the results in the same period of the prior year. Operating income for the fourth quarter was $2.99 billion, compared to $3.13 billion in the prior year. Operating income for the fourth quarter includes $756 million related to legal charges for antitrust-related claims.

Net income and diluted earnings per share for the fourth quarter were $3.70 billion and $0.34 per share, which included $0.05 of legal charges and $0.09 of tax benefits. For the previous year, net income and diluted earnings per share for the fourth quarter were $2.69 billion and $0.25 per share, which included a $0.02 tax benefit.

The company also announced record revenue of $39.79 billion for the fiscal year ended June 30, 2005, an 8% increase over the $36.84 billion reported last year. Net income for fiscal year 2005 was $12.25 billion and diluted earnings per share were $1.12, which included legal charges of $0.13 and tax benefits of $0.09. For the previous fiscal year, net income and diluted earnings per share were $8.17 billion and $0.75, which included legal charges of $0.17 and a tax benefit of $0.02.

The earnings call slide show is here.

While client revenues were up 10%, OEM revenues were up 14% and units were up 18%. This suggests the PC industry grew at the high end of Gartner and IDC estimates. Like Intel, Microsoft did not anticipate the robust growth in PC units.

Tools and Servers were up 16%, helped by 20% growth in SQL Server -- an industry standard RDBMS at this point by anyone's view.

Apps were up 11% and information worker (Office) up 3%. MSN was up 1% but home & entertainment was up 22% to $610 million based on robust xBox ecosystem (up 46%). Mobile revenues were up 39% to $97M as smart phones (finally) begin to kick in nicely.

For fiscal 2006 ending June 30, Microsoft projects the following revenue growth by segment:

• Client up 5-6% in a 7-9% global PC growth environment. No Longhorn revenues anticipated until FY 07 -- the 1st beta this summer and GA in second half calendar 2006. The declining revenue per PC reflects, I think, the growth of low-cost versions in developing countries. I believe the decline will be multi-year into the Longhorn product cycle.
• Server & Tools up 11-13% with new Visual Studio, SQL Server, and Exchange versions
• Information Worker up 5-6% but no new Office until FY07
• Applications up 10-11% in a 6-7% overall market growth in apps
• MSN up 2-4% with ads up 20% offset by declining access revenues
• Mobile (garbled and I missed it)
• Home & Entertainment up >50% with the holiday launch of xBox 360 console, games and services -- first in US, Japan and Europe. Note the original xBox will still be sold once xBox 360 is released.