Server Sales Boost Microsoft's 1Q ResultsServer Sales Boost Microsoft's 1Q Results

Back-to-school PC sales did what corporate IT spending couldn't in lifting Microsoft's sales for the quarter ended Sept. 30. On the strength of consumer demand for PCs and Xbox game consoles, revenue grew 6%, to $8.22 billion, compared with the same period a year earlier, while operating income inched up 4%, to $3.15 billion.

License sales of two of the company's flagship lines--client operating systems and desktop applications--were flat in Microsoft's first fiscal quarter of 2004. CFO John Connors says business spending held back the results, while consumer spending helped. "Corporate IT spending has been slower to recover," Connors said in a teleconference discussing the results.

Concerns over software vulnerabilities and IT security caused some companies to hold back on new deals. "Security concerns after [some] high-profile attacks diverted the focus of our customers, sales force, and channel from renewals," Connors said. One effect: Unearned revenue from multiyear license agreements dropped in the quarter.

Some of Microsoft's business software, however, did show substantial growth. The company's server and development-tools business grew 15%, to $1.87 billion, largely driven by demand for Windows Server, SQL Server, and Exchange Server. Windows Server 2003 licenses are selling at twice the rate of Windows 2000 Server when the product was introduced. Server licenses actually jumped 18% in the quarter, but the increase was offset by a 5% decline in sales of developer tools and related services.

Sales of enterprise applications jumped, too. Revenue from Microsoft's Business Solutions division grew 21%, to $128 million, in the quarter on the strength of Navision licenses. Yet, difficulty in realigning its sales force and channel partners to sell business applications negatively affected revenue and caused Microsoft to lower estimated sales in that part of its business for the rest of the year.

The company saw strength across all of its consumer businesses, Connors said. While the number of MSN subscriptions and subscription-related revenue both declined, advertising on the site jumped $81 million, or 51%, boosting total MSN revenue to $491 million. Home and entertainment revenue increased 20%, to $581 million, fueled by Xbox sales. Microsoft's mobile-devices business nearly doubled, to $53 million, on strong sales of Pocket PCs and MapPoint licenses.

Looking ahead, Connors mentioned some of the risks to future performance--noncommerical software and legal issues, among them. And if business customers aren't assuaged by Microsoft's security efforts, he said, "that could result in additional time being required to close deals."