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Microsoft beats Street
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July 18, 2000: 7:38 p.m. ET
Software giant's fiscal 4Q results bolstered by gains from investments
By Staff Writer David Kleinbard
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NEW YORK (CNNfn) - Microsoft Corp., the world's largest software company, on Tuesday reported fiscal fourth-quarter net income and revenue that exceeded analysts' expectations, aided by more than $1 billion in gains from investments.
The company's revenue remained flat from the comparable quarter last year, as sales of business personal computers were sluggish and customers delayed purchasing server software until the company rolls out its new Windows 2000 generation of server products.
For the fourth quarter ended June 30, Microsoft (MSFT: Research, Estimates) reported net income of $2.41 billion, or 44 cents per share, up from $2.2 billion, or 40 cents per share, in the same period last year. Analysts had expected the company to report earnings of 42 cents per share, according to earnings tracker First Call.
Microsoft's investment income in the fourth quarter rose to $1.13 billion from $485 million in the same period last year, while its operating profit declined to $2.52 billion from $2.9 billion. Analysts have been concerned that the company's substantial interest income and gains from investments make its quarterly results more difficult to interpret.
 The Redmond, Wash.-based company said that its revenue rose slightly to $5.8 billion from $5.76 billion. Analysts had expected Microsoft's revenue for the quarter to total $5.7 billion.
For the full fiscal year, Microsoft's net income rose 21 percent to $9.42 billion, or $1.70 per share, from $7.78 billion, or $1.42 per share, in fiscal 1999. Its full-year revenue rose 16 percent to $22.96 billion from $19.75 billion.
"We experienced another record year of business results despite many challenges. In particular, the Asia region rebounded nicely and our consumer business experienced a significant increase in revenue," said John Connors, Microsoft's chief financial officer, in a press release. "Although we remain guarded in the near term about business PC growth rates, we look forward to the tremendous opportunity in front of us with the Windows 2000 generation of server products."
A pivotal quarter for Microsoft
The quarter's results come as Microsoft faces both challenges and opportunities on several fronts. It was the first full quarter of sales for the company's Windows 2000 operating system, which is aimed at corporate users and is designed to supplant Windows NT. Last month, the company unveiled the Microsoft.NET platform, its next generation of software and services based on open Internet standards and protocols.
At the same time, however, Microsoft has had to cope with a growth rate of business PCs that is only in the single digits and with a sweeping antitrust challenge from the federal government and 19 states. That case is now in the appeals stage, following Judge Thomas Penfield Jackson's order that Microsoft be split into an operating systems company and an applications company.
In a conference call Tuesday evening, Microsoft executives said that they are "quite satisfied" with the deployment rate for Windows 2000 so far. The company boasted that customers who have bought Windows 2000 call for customer service less than half as often as they did with Microsoft's previous release of a business operating system.
Royal Dutch/Shell, Xerox Corp., Reed Elsevier, and Motorola Inc. are among the large companies that are deploying Windows 2000 Professional, Microsoft said.
Expectations for future revenue and earnings
Microsoft's Connors gave his outlook for the company's revenue and earnings for the next fiscal quarter and fiscal year in the conference call Tuesday evening. For all of fiscal 2001, he expects revenue to increase 15 percent, although marketing expense will rise by 20 percent, as the company plans to spend large sums to promote its online properties and consumer offerings. Research and development spending for fiscal 2001 is expected to rise 15 percent to $4.4 billion.
Connors' said that Microsoft's expectation for its fiscal 2001 earnings per share remains at $1.88, which is the same as the mean analyst estimate, according to First Call.
Connors expects that Microsoft's revenue for the first quarter of fiscal 2001 will increase 5 percent from the same period in fiscal 2000. Earnings per share for that quarter are likely to be 41 cents, 3 cents above the same period last year, the Microsoft CFO said. That would be 2 cents lower than the current mean analyst estimate. Company execs forecast that gains from investments would be "significantly lower" than the fourth quarter's $1.13 billion, but didn't give a specific figure.
Revenue breakdown by segment, balance sheet
Revenue within the company's productivity applications and developer products division -- which includes desktop applications such as Microsoft Office and server applications such as Microsoft SQL Server -- declined to $2.64 billion from $2.93 billion in the same quarter last year. However, Microsoft had an unusual $200 million jump in revenue from its Office suite in the comparable quarter of 1999.
Revenue from the company's Windows Platforms -- which includes Windows 98, Windows 2000, and Windows NT -- rose to $2.37 billion in the fourth quarter, compared with $2.25 billion in the fourth quarter of the prior year. Microsoft said that its Windows desktop operating systems revenue growth was modest because of soft demand for business PCs during the majority of the year and a slowdown in shipments in anticipation of the Windows 2000 operating systems.
Microsoft is experiencing significantly faster revenue growth in its consumer segment - which includes Internet access, online services, and game software - than its other business divisions. Revenue in the June quarter increased 34 percent to $796 million. The company said on Monday that more than 3 million users subscribe to the Microsoft Network for their Internet access and that Microsoft's network of Web sites now have more than 201 million unique visitors per month, a greater number than Yahoo!'s audience.
Microsoft ended the quarter with almost $24 billion in cash and $17.7 billion in investments. The company has generated an amazing $25 billion of cash during the past three years alone. If it were an investment fund, rather than a software company, it would be one of the largest funds in the United States.
The company's stock closed Tuesday at 78-1/2, up 5/16, in regular trading on Nasdaq. In after-hours trading, it rose 1-1/2 to 80. 
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