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Microsoft sees slowdown
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April 22, 1998: 8:31 p.m. ET
Software developer beats Wall Street estimates, but growth lowest since '96
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NEW YORK (CNNfn) - Microsoft Corp. Wednesday reported better than expected fiscal third-quarter earnings, but warned growth would slow for the remainder of 1998.
After Wednesday's market close, the Redmond, Wash.-based company posted third-quarter earnings of $1.34 billion, or 50 cents a diluted share, on revenues of $3.77 billion compared with net income of $1.04 billion, or 40 cents a diluted share, on revenues of $3.2 billion a year ago.
While those numbers beat consensus estimates of 48 cents a share, Microsoft's revenue growth in the quarter slowed to its lowest level since 1996.
Microsoft shares slipped to 98-1/4 in after- hours trading from the earlier New York close of 98-7/8.
"We are gratified that the quarter's results confirm that consumer demand remains strong for Microsoft products...but it is critical to note that our growth has slowed for each of the last four quarters and we are likely to experience slower growth for the balance of calendar 1998," said Greg Maffei, Microsoft's chief financial officer.
Maffei said the growing popularity of sub-$1,000 computers, combined with the fact that businesses are devoting more money to averting the Year 2000 problem, could also crimp earnings going forward.
"The bulk of our revenue in the sub-$1,000 space comes from [operating system] revenue. We have, in some cases, had people who sold Office pre-installed that may be shifting to [Microsoft] Works instead. It's hard to know how much that is, but we're having a tougher time in some of those markets," he said.
Microsoft's results showed little fallout from the ongoing antitrust investigation by the Justice Department.
On Tuesday, three appellate court judges sharply questioned government antitrust lawyers at a hearing in Washington. The government is seeking to prevent Microsoft from forcing computer makers to ship its Internet Explorer browser with copies of its popular Windows 95 operating system.
Microsoft officials plan to begin shipping copies of its next generation operating system -- Windows 98 -- to PC makers on May 15. Retail copies are scheduled to go on sale in late June.
Microsoft, which is known for issuing pessimistic outlooks, said sales of Windows 98 may start off slow.
"I would caution those who have large estimates for retail sales of this product, particularly in the fourth quarter. The product will launch in late June, so there will be insufficient time for re-sellers to re-order it," Maffei said.
Nevertheless, industry analysts said Microsoft's performance in the just-completed third quarter, was impressive in light of the fact the software giant did not have a major new product to peddle.
"I think what's really amazing is this is the kind of growth they're showing without a new product cycle," analyst Esther Schreiber of CS First Boston said. "What happens when they have a new product cycle?"
Microsoft said business fundamentals continued strong across most areas, including North America, but officials said they were still concerned about the Far East. However, Microsoft Executive Vice President Steve Ballmer said that while business is not improving in the region, preliminary evidence shows declines have subsided.
John Puricelli, technology analyst at A.G. Edwards & Co., was not that surprised that Microsoft wasn't able to keep up the torrid growth rates of the past.
"I would say that you really have to pay attention to their guidance when they say that the growth rates are slowing," he said. "No matter how you really slice it, this is a $14 to $15 billion revenue company and it's going to be very difficult for them to keep growing at 50 percent growth rates."
Puricelli said the real surprise was that sales to computer makers grew more than expected.
Speaking on the effect Asia will have in the coming quarters, Maffei said the demand in Korea and Thailand continues to decline. Sales in Japan -- which accounts for 75 percent of sales in the region -- climbed slightly in the quarter, but much of that may be due to companies getting in purchases by the end of the fiscal year.
Whereas Asia has regularly hiked the company's overall growth rate by 2 percent or more, Maffei said it could cause it to fall for the rest of 1998 and through 1999
Looking forward to 1999, Maffei was cautious about profits in the first half. Some factors that could hamper growth include slower PC shipments, continuing economic problems in Asia and the fact that many current software products are near the end of their life cycle.
"Revenue is likely to be flat in the first quarter and only slightly higher in the second quarter due to seasonal factors. [Earnings per share] is likely to be consistent with the fourth quarter of 1998. Revenue and earnings may increase in the third and fourth quarter, but the magnitude will depend on the acceptance of Windows NT 5.0 and the acceptance of Office," he said.
-- from staff and wires 
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