Microsoft meets estimates

January 18, 2001: 7:33 p.m. ET

Software giant's earnings up slightly as PC sales slow but servers sales pick up

NEW YORK (CNNfn) - Hit by a worldwide slowdown in personal computer sales and corporate spending on information technology, the software giant Microsoft reported its fiscal second-quarter profit was up slightly over the same period last year and in line with analysts' lowered expectations.

Microsoft (MSFT: Research, Estimates) reported after the close Thursday that its net income for the quarter ended Dec. 31 was $2.62 billion, or 47 cents per share. That compares with $2.44 billion, or 44 cents, in the year-ago period. The year-ago figure included a one-time charge of 3 cents per share.

The latest results matched the mean analyst expectation for the quarter, according to First Call/Thomson Financial.

The Redmond, Wash.-based company's revenue rose 8 percent to $6.59 billion from $6.11 billion in the same period last year. Analysts had expected its revenue to total $6.51 billion, according to First Call.

While Microsoft's net income and revenue reached record levels in the quarter, the company remains guarded about the future because of softening spending on its Windows operating system, which powers most of the world's personal computers, and its applications, such as the Microsoft Office suite.

"While we are enthusiastic about the break-through products and services the company will be delivering in 2001, we remain guarded about the near-term economic outlook and its impact on PC demand and technology spending," said Microsoft CFO John Connors in a statement.

Microsoft told investors that it expects its revenue for the March quarter to be between $6.3 billion and $6.4 billion, which is in line with current analyst estimates. It forecasts earnings per share of 42 cents or 43 cents for that period, versus the current mean analyst estimate of 44 cents.

For the fiscal year ending June 30, the software giant expects its revenue to be $25.2 billion to $25.4 billion, which is in line with analyst estimates and up to 11 percent above the previous fiscal year. Microsoft forecasts that its earnings per share for the fiscal year will be between $1.80 and $1.82, which also is even with current analyst expectations.

Microsoft's stock closed up $2.56 at $55.50 in regular trading Thursday, amid a broad rally in tech shares. The shares added another $3.50 to $59 in after-hours trade but are down about 50 percent from their 52-week high of $118.62

December revenue warning
Last month, the software giant warned investors that a worldwide slowdown in personal computer sales would result in disappointing profits and revenue. It was the first time in 10 years that the company issued a sales warning. At the time, Microsoft said its revenue for the December quarter would be between $6.4 billion and $6.5 billion, with earnings per share between 46 cents and 47 cents. That was 5 to 6 percent below the company's prior guidance.

In an interview on CNNfn's Moneyline News Hour Thursday, Goldman Sachs analyst Rick Sherlund said while the latest results were tepid, the fact that Microsoft executives did not ratchet down their expectations for the current quarter and the remainder of the fiscal year could bode well for its shares. (166K WAV) or (166K AIFF)

Click here to check on other software stocks
"The slowdown in consumer PC sales could not have come at a worse time for Microsoft," said CIBC World Markets analyst Melissa Eisenstat in a recent research note. "The December quarter is seasonally the heaviest period of consumer buying because of Christmas."

In addition, Microsoft is still battling a sweeping antitrust case brought by the Justice Department and the attorneys general from 19 states. Last June, Judge Thomas Penfield Jackson issued a final order requiring Microsoft to separate its Windows operating system business from its applications business and barring the company from engaging in practices that the court found led to antitrust law violations. However, Jackson's order doesn't go into effect until Microsoft has exhausted its appeals.

Strong demand for Windows 2000, server software
Microsoft said its fiscal second-quarter revenue gain was driven by strong customer demand for Windows 2000 Professional, Windows 2000 Server, and its family of .NET enterprise servers software.

"We made outstanding progress against our competitors in buildingmission-critical business solutions for large enterprises," Connors said in a statement.

Sales of the Windows family of operating systems reached record levels inthe quarter, driven primarily by strong performances from Windows 2000Professional and Windows 2000 Server, Microsoft said. Sales of desktop operating systems rose to $2.06 billion in the second quarter from $1.83 billion in the same period last year.

Sales of desktop applications -- including the Office suite, Project and Visio -- dropped to $2.48 billion from $2.53 billion. Enterprise software and services revenue, which come mostly from server software, rose to $1.24 billion from $1.03 billion.

Microsoft ended the quarter with $26.9 billion in cash and investments.