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Microsoft's 2nd-Quarter Profit Up 75% on Strong Sales

Earnings: Net income of 73 cents a share significantly beats analysts' estimates. Share price soars in after-hours trading.

January 20, 1999|From Bloomberg News

REDMOND, Wash. — Beating analysts' estimates by a wide margin, Microsoft Corp. said fiscal second-quarter profit rose 75% on strong sales of its Office 97, Windows NT and other software.

The world's largest software company said net income for the period ended Dec. 31 rose to a record $1.98 billion, or 73 cents a share, from $1.13 billion, or 42 cents, in the year-earlier period. The average analyst estimate was 59 cents a share, according to First Call Corp. Revenue rose 38% to a record $4.94 billion from $3.59 billion.

Microsoft's Office 97 package of business software continued to generate strong sales almost two years after its introduction. Microsoft's Windows NT operating system, the linchpin of its push into the corporate market, also did well. Server software such as Exchange electronic mail and SQL Server database management turned in a strong performance.

"They usually beat by a penny or two, but this is huge," said analyst Aaron Scott of Sands Brothers & Co., who rates the stock "buy." Microsoft's per-share earnings and revenue beat his estimates of 58 cents and $4.5 billion.

Microsoft shares soared in after-hours trading following the earnings announcement, climbing as high as $164.88. Earlier in the day, the shares rose $5.88 to a record $155.63 on Nasdaq. The stock has more than doubled over the last 12 months.

With the latest results, Microsoft has beaten earnings forecasts for five quarters in a row. Its buoyant performance in the December period followed the pattern set last week by Intel Corp. and Apple Computer Inc., both of which topped earnings expectations.

"Microsoft is firing on all cylinders, with nitrous oxide instead of regular gasoline," said Brett Berry, a portfolio manager with Bailard, Biehl & Kaiser, after the results were released. The fund owns 144,508 shares in Microsoft.

Concern about the year 2000 computer bug caused a spike in Microsoft sales, the company said in a statement. Some older software confuses the year 2000 with 1900 because it reads only the last two digits. Companies worldwide are spending billions of dollars to fix or replace their software to avoid Y2K computer problems when 2000 arrives.

Still, Microsoft was cautious about growth prospects.

"We remain guarded about growth in 1999, given the likelihood that organizations will reduce their non-Y2K-related information technology spending and the uncertain international economic outlook," Chief Financial Officer Greg Maffei said.

Maffei said on a conference call with analysts and investors that he expects third-quarter revenue to decline about $300 million from the second quarter, which ended in December. Microsoft's fiscal third quarter ends in March.

The company expects third-quarter earnings per share to rise 25% from the year-earlier period. Maffei said analysts' average earnings estimate are 2 cents to 3 cents too low. Analysts expect the company to earn 60 cents in the fiscal third quarter ending March, according to First Call.

Microsoft's landmark antitrust trial, into its fourth month, apparently had no effect on the bottom line. The U.S. Justice Department and 19 states have accused Microsoft of unfairly using its monopoly in PC operating systems to crush competitors in Internet software, such as Netscape Communications Corp.

* MORE EARNINGS: Rockwell, BankAmerica, other earnings. C2-4

* PICKING WINNERS: Scoring system identifies potential earnings "surprises." C4

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