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Microsoft whips estimates
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January 19, 1999: 6:56 p.m. ET
Company beats 2Q forecasts by 14c per share, bolstered by corporate sales
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NEW YORK (CNNfn) - Microsoft Corp. Tuesday reported a 75-percent increase in fiscal second-quarter profits, far exceeding Wall Street forecasts as the software titan boosted sales of its high-margin corporate products.
For the quarter ended in December, the Redmond, Wash.-based company posted a profit of $1.98 billion, or 73 cents per share, on $4.94 billion in revenue. That blew away analysts' estimates of earnings of 59 cents per share, according to First Call.
Microsoft 's (MSFT) profit represents a 75 percent increase over its year-ago second-quarter results, when it earned $1.13 billion, or 42 cents per share, on $3.6 billion in revenue.
"This was beyond most people's wildest dreams," said Jeffrey Maxick, an analyst at Madison Securities. "They keep running on all cylinders and I don't see anything in the way to stop it."
Coffers stuffed with greenbacks
Microsoft also ended the quarter with an astounding $19.2 billion in cash, up from $14 billion in June, meaning the company was able to pay off all its bills and still deposit nearly $1 billion a month into the bank.
Microsoft's ability to generate such phenomenal sums of cash for its products is just one reason the government has taken such a tough stance against the company in court, accusing Microsoft of using its dominance in the operating software business to bully competitors and partners alike.
But those concerns are certainly not shared by investors. Microsoft shares surged 5-7/8 Tuesday to 155-5/8 ahead of the earnings news and then jumped to 164 in after-hours trade.
Strong PC demand cited
Microsoft said strong PC demand helped boost sales of its core products: Windows 98, Windows NT and Microsoft Office. Sales of its "platform products," or operating systems, rose 50 percent to $2.32 billion.
Part of Microsoft's earnings boost also came from sales of high-margin corporate products, such as its SQL Server database and Exchange Server collaboration software.
"Corporate customers are choosing the Microsoft platform," said Bob Muglia, Microsoft senior vice president, applications and tools division. "Microsoft Office, SQL Server and Exchange all reached new highs this quarter, with shipments of all server applications nearly doubling in the past year."
Microsoft's second-quarter profit margin of 40 percent easily bested last-year's 31 percent margin.
The company is preparing for the launch of its Office 2000 software collection, which is due for release at the end of March and should provide another boost to Microsoft's already robust revenues.
"Office produces about one-third of Microsoft's revenue," Maxick said. "I'm pretty sure I'll be raising my third-quarter revenue and earnings estimates."
However, some Office product revenues may be skewed in the third and fourth quarters. Microsoft will include a coupon for a free upgrade to Office 2000 for customers who purchase Office 97 in the third quarter.
Maffei said Microsoft will not recognize the revenues for Office 2000 until it ships the upgrade to customers who redeem the coupons, and some of those upgrades won't be shipped until the fourth quarter.
Microsoft also is counting on a big revenue boost from Windows 2000, the next version of its Windows NT operating system designed for corporate networks. Windows NT Workstation costs about $100 more than Windows 98, Microsoft's consumer-level operating system.
The company has been working to turn corporate users away from Windows 98 to Windows 2000. But Microsoft said Monday it was delaying the release of the final test version of Windows 2000 for two to four weeks to assure certain quality levels. Microsoft said it still plans an official release of Windows 2000 by the end of the year.
Cautious outlook
As it often does after reporting strong quarterly earnings, Microsoft expressed caution about its future growth. Maffei said he expects third-quarter earnings and revenues to drop "quite a bit" from second-quarter levels due to seasonal issues, global market conditions and especially year-2000-related issues.
"IT [information technology] departments are likely to lock down their desktops to test for Y2K compatibility," Maffei said. "It seems likely revenue will be down $300 million due to seasonal factors, worsening international economic conditions and Y2K."
Maffei noted that he expects sales growth of operating systems and Microsoft Office to slide significantly in the third quarter as IT departments freeze their PC purchases due to Y2K issues.
One positive outlook, however, revolved around MSN.com, Microsoft's Web portal. Maffei said advertising revenues on MSN grew 400 percent from year-ago levels.
"I expect similar results in the third quarter," Maffei said.
Gov't says Microsoft is a monopoly
Microsoft's strong earnings underscores its antitrust battle with the Justice Department and 19 states. The government claims Microsoft is a monopoly that must be stopped if competition is to thrive in the computer industry.
Microsoft has long claimed that its 95 percent Windows market share doesn't necessarily make it a monopoly because other companies have the opportunity to cut into its business.
But Maxick noted that, unlike other computer-industry players, Microsoft doesn't spread the wealth when it reports strong earnings.
"When Compaq (CPQ) and Dell (DELL) report good numbers, those companies are sharing the good news with other (computer) companies," Maxick said. "With Microsoft, they're it. If business is going well for Intel (INTC), it's amplified even more for Microsoft. With Microsoft, it doesn't matter if it's a $900 computer or a $2,000 computer being sold, they get the same licensing fee for Windows."
For the six months ended Dec. 31, 1998, Microsoft posted earnings of $3.67 billion, or $1.35 per share, on revenue of $8.9 billion, compared with year-ago profits of $1.8 billion, or 67 cents per share, on $6.7 billion in revenue.
-- by staff writer John Frederick Moore
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