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ComputerWire: IT Industry Intelligence

Just days into 2003, Microsoft has predicted 2004 will be "daunting". Faced with an uncertain economy and growing competition from Linux to Microsoft's server revenues, the company faces a tough time improving on this year's results.

That's according to the company's chief financial officer John Connors who, announcing second quarter results, Microsoft's first dividend and a stock split, outlined the challenges faced in the company's next fiscal year - which starts in July.

"Linux continues to be a threat to our server business. The ramifications of free software should be clear to everybody," Connors told financial analysts during a conference call yesterday.

Commenting on the company's fiscal 2004, Connors added Microsoft's sales staff would require an external economic fillip to help them climb above this year's relatively flat results.

"Corporate IT spending continued to be tepid," Connors said of this year.

"Comparables [with 2003] will be daunting. It would be great to get some help from a better world wide economy, but the comparables for 2004 will be tough." Connors' also lowered his revenue guidance, given last quarter, for fiscal 2003 to between $31.9 and $32.1bn.

Despite the tough consumer and business spending climate, Microsoft managed stable performance. The Redmond, Washington-based company reported an 11% increase in net income to $2.52bn for the period to December 31 on revenue that grew 10% to $8.54bn. Microsoft reported earnings per diluted share of $0.47, up from $0.41.

For the six months, Microsoft reported a 48% jump in net income to $5.27bn on income that grew 17% to $16.28bn. Revenue per diluted share was $0.97 from $0.64.

Gone, though, was the stunning first quarter growth spike associated with a last minute corporate scramble to sign-up to volume license agreements ahead of Select Assurance.

Server software, the object of Connors' concern in view of Linux's assault, saw revenues grow during the second quarter 12% to $1.76bn. SQL Server 2000, Connors said, enjoyed healthy double-digit growth. Client revenues came in at $2.5bn, information worker revenue grew 8% to $2.29bn and MSN 23% to $449m - MSN's growth figures exclude Expedia.

Home and entertainment, including Microsoft's Xbox, saw 40% revenue growth to $1.33bn driven primarily by sales of the games console. Microsoft sold 8 million units world wide, with 5.4 million in North America, 1.8 million in Europe and 800,000 in Asia Pacific. Microsoft is aiming for "a little over" 9 million units sold by the end of its fiscal year.

Also performing well was its Windows CE and mobility business unit, whose revenue grew 35% to $22m

As such, Microsoft announced its first dividend on a $43bn cash reserve. President Bush recently proposed eliminating tax stock holders pay on dividends, but the company said changes in its legal fortunes had helped settle some longer-term questions over cash.

Microsoft last week resolved a set of class action law suits with the state of California for a $1.1bn settlement, while District Court Judge Colleen Kollar-Kotelly last November settled the company's long-running antitrust case with the US government.

Connors called the dividend a "starter dividend". "As we go forward, we will look at our legal, risk, research and development and other periodic uses of cash. This is a good place to start," Connors said.

Microsoft said its annual dividend will pay out $0.16 cents a share, or about $850m. The company also announced plans to split its stock 2-for-1, leaving it with about 10.8 billion common shares. After the split, the dividend will be $0.08 a share.

© ComputerWire

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