Microsoft wary ahead of launches

Microsoft on Thursday predicted a slower than expected ramp up in sales for some of its widely-awaited new products, due in part to likely shortages of the new Xbox 360 games console until early next year.

The cautious comments came as the software company reported that it had lifted its underlying operating income by 10 per cent in the latest quarter, reflecting success in offsetting a jump in sales and marketing costs as it prepares for its most important round of new product launches in years.

The launch next month of the Xbox 360 games console, along with new versions of the SQL Server database software and Visual Studio developer tools, marks the start of a vital round of new products leading up to the release of new Windows and Office late next year.

Microsoft issued a more cautious forecast of early sales of these new products than Wall Street had been expecting: revenues in the three months to the end of December were likely to reach $11.9-12bn, it said, below forecasts of $12.3bn, while expected earnings per share of 32-33 cents are lower than Wall Street’s 35 cent forecast.

Chris Liddell, chief financial officer, said the forecast partly reflected expected shortages this year of the new Xbox console, which is due to be launched in the US on November 22nd. Supply of the new boxes was likely to catch up with demand after the end of the year, he added.

Microsoft also on Thursday reaffirmed its forecasts for revenues in its full fiscal year, to the end of September, indicating that it expected sales to pick up steadily in later months.

Sales and marketing costs jumped 17 per cent in the latest period , the first in the company’s latest fiscal year, as it prepared for the launches to come. In spite of that, operating income, before the impact of legal costs, jumped by 10 per cent, to $4.4bn.

Revenues climbed by 6 per cent to $9.74bn, in line with expectations, as the server division once again registered the strongest growth among Microsoft’s more mature businesses.

Server sales rose 13 per cent to $2.5bn, while revenues of the Windows client division were up 7 per cent at $3.2bn and the information worker division, which handles Office, rose 4 per cent to $2.7bn.

The software company also vowed on Thursday to complete a landmark $30bn share buyback plan by the end of 2006, a year earlier than promised, though it failed to announce the dividend increase that some on Wall Street had sought.

In spite of last year’s huge one-off distribution of cash to shareholders, Microsoft has continued to amass a new cash mountain, with operating cashflow in the latest quarter alone of $4.3bn. Among other business divisions, the MSN online service reported a 1 per cent increase in revenues, to $564m, as it continued to struggle with the transition from an old internet access model to one supported by advertising.

Reported net income rose 24 per cent to $3.1bn, or 29 cents a share. Excluding the effect of a 2 cents per share legal charge to cover the costs of an anti-trust settlement with RealNetworks, Microsoft’s earnings would have been 1 cent ahead of Wall Street expectations.