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Microsoft sees strong 3Q
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March 24, 1998: 8:50 p.m. ET
Earnings to be about 48 cents; company loses early Java fight
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NEW YORK (CNNfn) - Microsoft Corp. Tuesday surprised analysts by announcing its third-quarter profits would beat Wall Street's expectations.
However, the news was tempered by a preliminary ruling barring the company from claiming two of its leading products were compatible with the Java programming language.
In a conference call after the market closed, Chief Financial Officer Greg Maffei said he expected the software giant's earnings to equal about 48 cents a share, compared with the 40 cents a share in the year-ago period. Analysts on Wall Street had expected profits of 44 cents.
"I'm happy to report Microsoft's business remains quite good. The fiscal third quarter is shaping up to be better than expected based on trends in the last few quarters," Maffei said.
Microsoft is scheduled to release its third-quarter results on April 22.
Christopher Galvin, technology analyst at Hambrecht & Quist said the upbeat announcement was very favorable.
"It's actually amazing that so many companies are announcing shortfalls and discussing weakening fundamentals and Microsoft is powering through with another quarter that beats expectations," he said.
Microsoft said revenues for the current quarter ending March 30 would be 17 to 18 percent higher than the $3.2 billion posted in the comparable year-earlier period.
However, Maffei said Microsoft expected earnings for the fourth quarter ending June 30 to be slightly lower than the third-quarter, although still "several pennies" above the consensus estimate of 43 cents a share.
While growth is still occurring, Maffei said it is definitely slowing.
"Over the last three fiscal quarters, the average quarterly growth rate has been about 50 percent. This quarter will be less than 30 percent and this is likely to be the highest-growth quarter in calendar 1998.
"The next three quarters appear to be slower growth and perhaps lower in [earnings per share]," he said.
Galvin downplayed Microsoft's somewhat pessimistic outlook, saying it's a traditional posture.
"Their business on all fronts is hitting on all cylinders, including Windows 95, NT, Office 97 and Back Office. Microsoft typically delivers good news, but tries to convince people it is not guaranteed," he said.
Maffei said sales of the company's Office productivity suite continues to grow nicely, particularly in Europe and North America.
"We are quite gratified with the demand, but are worried as always that the growth isn't sustainable," he said.
The company also said the outlook for its Windows NT network server and Back Office line was strong. Windows NT and Back Office can be used to serve up files and information across networks to desktop computers. The products are used as an alternative to UNIX workstations.
The executive's remarks represented a rare occurrence for Redmond, Wash.-based Microsoft, which traditionally comments only after results are released. In addition, Maffei is known throughout the industry for his conservative forecasting.
Maffei said Asia's economic troubles won't pose as much of a financial threat as initially thought possible because the company was planning for a larger drop in exchange rates. Now that currencies have stabilized, the outlook is better than initially projected.
On the Java front, a federal judge ordered the company to remove the "Java compatible" logo from its Internet Explorer browser and Java software developers kit, which had been promoted as "Java-compatible" under a license with Java creator Sun Microsystems Inc.
Computer workstation maker Sun, creator of the programming language, had requested the action as part of its lawsuit charging the software giant violated a license agreement by shipping versions of the Java technology that don't comply with its standards.
In a statement, Microsoft said it was disappointed by the decision and is confident it will ultimately win the case.
"We will immediately comply with the court's order, but we remain confident that once all the facts are presented in the larger case, the court will find Microsoft to be in full compliance," the company said.
Microsoft spokesman Mark Murray told Reuters no decision had been made on whether to appeal.
Scott McNealy, chairman and chief executive officer of Sun -- who learned about the decision Tuesday in an appearance on "Moneyline With Lou Dobbs" -- praised the judge's ruling. (306K WAV) or (306K AIFF)
McNealy said it would take some time to get the issue settled, but believes Tuesday's ruling was a good start.
:"Developers, users and manufacturers know whatever Microsoft is doing isn't Java, isn't compatible and isn't authorized. The lawsuit is going after all issues of breach of contract. If they're found guilty, [it will] move into the remedy and damage stage. It will probably take a year or more to come to conclusion, but we're very excited about step one," he said.
--by staff writer Cyrus Afzali
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