SEATTLE – Microsoft Corp. (MSFT), despite spooking investors with a forecast for lower investment income and earnings this fiscal year, may fare better than expected as long-term contract bookings rise, analysts said Friday.
Shares of the world's largest software maker fell nearly 3 percent after Microsoft on Thursday posted earnings in the latest quarter that failed to beat Wall Street's consensus forecast. The company also reduced its net profit estimate for fiscal 2005 by as much as 11 percent.
Analysts pointed out that Microsoft had recorded a $406 million investment loss as it unwound derivatives used to hedge its massive investment holdings ahead of cash payouts starting this quarter.
The Redmond, Wash., company said earlier this week that it would pay out more than $75 billion to shareholders over the next four years by boosting dividends and buying back shares. A special one-time $3 per share dividend costing $32 billion will be paid by the end of 2004, subject to shareholder approval.
"The miss in earnings and guidance can all be attributed to the decline in interest income," said Brendan Barnicle, analyst at Pacific Crest Securities.
Despite the intense focus on Microsoft's cash, which stood at $60.6 billion in June, and its impact on investment income, Microsoft continued to book long-term contracts that defer revenue to later quarters.
Unearned revenue, reflecting sales that are booked but not yet recognized, grew by $651 billion in the latest quarter, about $200 more than several analysts had expected. Unearned revenue that is booked but not yet on the balance sheet actually grew where many had expected a decline.
Two years ago, Microsoft adopted a licensing plan to encourage corporate customers to sign up for long-term contracts, as a way to shield itself from the slump in technology spending after the dot-com bubble burst. Such licensing would also help to smooth out any volatile swings in revenue related to product upgrade and release cycles.
The initial rush to adopt new long-term service plans, many in the form of two-year contracts, created a huge chunk of revenue that was recognized this year as the contracts expired.
All this points to a stable revenue base over the next several quarters that will protect Microsoft from any sudden drop in demand and give it a chance to surprise on the upside, said Sanford C. Bernstein software analyst Charles Di Bona.
"You've got to look for growth on top that," Di Bona said. "No one else is growing like that."
Analysts expect Microsoft executives to provide more specific guidance on how other parts of its business, such as software for servers or small businesses and Xbox, will contribute to growth it its annual analysts meeting next Thursday, July 29.
Of the 31 analysts tracking Microsoft, 28 still rate the software company as a "buy" or "outperform," while only three rate it as a "hold," according to a survey by Reuters Estimates.
Microsoft's stock fell 97 cents, or 3.34 percent, to $28.03 on the Nasdaq Friday. It is up 6.6 percent from a year earlier.