Friday, Oct. 24, 2003 | 9:35 a.m.
SEATTLE -- Microsoft Corp. shares fell 6 percent today after the company reported a sharp drop in new corporate contracts as the Blaster computer virus attacked computers around the world two months ago and left distracted sales people unable to close new deals.
"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," said Charles DiBona, a senior research analyst with Bernstein, an investment research firm.
Microsoft's stock fell $1.78 to $27.13 in morning trading on the New York Stock Exchange.
Still, Microsoft on Thursday reported a 28 percent surge in first-quarter profit, to $2.61 billion, or 24 cents a share, compared with $2.04 billion, or 19 cents a share, for the same period a year ago.
Revenue rose 6 percent to $8.22 billion from $7.75 billion last year.
Excluding a charge for stock-based compensation to employees, Redmond, Wash.-based Microsoft reported a profit of 30 cents a share, beating the consensus estimate from analysts polled by Thomson First Call of 29 cents a share on revenue of $8.08 billion.
Strong personal computer sales -- particularly to consumers -- helped drive revenue higher in the flagship Windows operating system division, said Microsoft chief financial officer John Connors, although corporate technology spending remains tight. The company also saw a 15 percent increase in its sales of software for servers.
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 $200 million to $300 million, fell about $750 million.
Besides the disruption the Blaster virus wrought, the company had simply been too optimistic on contracts from large companies, Connors said.
But he added Microsoft expects to perform well in the rest of its fiscal year, with security now the "No. 1 priority."
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 $34.8 billion to $35.3 billion. Profits are expected to be 86 cents to 88 cents 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. "I think the load of factors balance out the disappointing deferred revenue number."
For the second quarter, Microsoft projects revenue between $9.7 billion and $9.8 billion with profits between 23 cents and 24 cents a share.
Microsoft's cash reserve now stands at $51.6 billion. The company is due to pay out its second dividend, 16 cents a share, on Nov. 7.
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