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Sat, Oct 25, 2003 - Page 12 News List

Security fears hurting Microsoft

STILL PROFITABLE The software firm added 28 percent to its quarterly profits, but analysts say security concerns are causing corporations to reconsider using MS products

AP , SEATTLE

Microsoft Corp's first-quarter profit surged 28 percent, but the software company signed far fewer new contracts with corporate customers than it expected, the company said.

Analysts said the drop in business was disappointing and reflects Microsoft's need to improve the security of its software. Microsoft acknowledged that fallout from the Blaster virus, which exploited a flaw in most versions of its Windows operating system, contributed to the shortfall.

"It's one thing to have the security issue give you bad [public relations]. But it's another thing to have it impact your sales cycle," Charles DiBona, a senior research analyst with Bernstein, an investment research firm, said Thursday.

For the July to September quarter, Redmond, Washington-based Microsoft reported a profit of US$2.61 billion, or US$0.24 a share, compared with US$2.04 billion, or US$0.19 a share, for the same period a year ago.

Revenue rose 6 percent to US$8.22 billion, compared with US$7.75 billion last year.

Excluding a charge for stock-based compensation to employees, Microsoft reported a profit of US$0.30 a share, beating the consensus estimate from analysts polled by Thomson First Call of US$0.29 a share on revenue of US$8.08 billion.

Strong personal computer sales -- particularly to consumers -- helped drive revenue higher in the flagship Windows operating system division, Microsoft chief financial officer John Connors said. The firm saw a 15 percent increase in its sales of server software.

In addition, the company announced the first quarterly profit for the company's MSN Internet division, founded in 1995, despite a drop in the number of subscribers to 8 million.

The business has been buoyed by an increase in ad revenue, both from companies paying to be included in search listings as well as overall Internet marketing, Connors said.

But Microsoft's balance sheet took a hit with a sharp decline in unearned revenue -- proceeds from contracts that are recognized as revenue over time. Unearned revenue, projected to decline by US$200 million to US$300 million, fell about US$750 million.

Connors said sales people also were distracted from selling contracts by helping customers deal with the Blaster virus.

The virus, which targeted a flaw in most current versions of the Windows operating system software, attacked hundreds of thousands of computers around the world, causing frequent shutdowns and slowing networks.

Security, however, is Microsoft's "No. 1 priority," Connors said.

"I would say we missed the forecast, so you should have a concern, but we feel pretty good about what the next three quarters look like relative to the market and relative to competition," he said.

But analysts noted that the company as a whole offered some good news, with its slightly raised outlook for the year. Microsoft is now projecting revenue in the range of US$34.8 billion to US$35.3 billion. Profits are expected to be US$0.86 to US$0.88 a share.

"What you have to look at is deferred revenue in combination with revenue guidance" among other factors, said Peter Misek, director of software and IT services research at Scotia Capital.

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