Microsoft Q2 earnings soar 74 per cent

Strong growth in PC shipments, combined with software purchases made in preparation for expected year 2000 problems, helped push Microsoft's revenue and income to record levels in the second quarter of fiscal year 1999.

Net income for the quarter, ended December 31, was $US1.98 billion or 73 cents per diluted share, up 74 per cent from 42 cents per share a year ago. The results soundly beat the expectations of 23 brokers polled by First Call, who produced a consensus estimate of 59 cents per share for the quarter.

Revenues totaled $4.94 billion, a 38 per cent increase over the $3.59 billion during the year ago quarter.

Sales of Microsoft Office, SQL Server and Exchange all reached new highs for the quarter, with shipments of all server applications nearly doubling in the past year. Sales of Microsoft Exchange Server set a new record, shipping 4.5 million client access licences in the quarter, Microsoft officials said.

However, the company remains guarded about prospects for continued growth in 1999. Companies may cut back on desktop and server spending this year, reserving their IT budgets for testing and other expenses related to the year 2000 problem, said Greg Maffei, Microsoft's chief financial officer.

He also warned of an uncertain economic outlook in which troubles affecting Asian markets may spread to other regions. "Business remains tough in China and Korea, business is very tough in Russia, and we saw down performance in Malaysia and Indonesia," Maffei said.

But if Microsoft executives have been losing sleep over the company's ongoing antitrust trial in Washington and over publicised delays in the release of Windows 2000, they seemed upbeat today about the quarter's performance.

"These are huge results," Jerry Masters, Microsoft's senior director of planning and reporting, said.

Sales of software licences to PC manufacturers soared 48 per cent to $1.8 billion, driven by an increase of more than 25 per cent in worldwide PC sales, especially in the sub-$1000 category, Maffei said. Increased shipments of Windows NT also boosted OEM licence sales, he said.

Overall platform revenues -- comprising mostly operating systems sales -- grew 50 per cent in the quarter, to $2.3 billion. Revenues from software applications and tools grew 27 per cent to $2.2 billion, Microsoft officials said.

Asian markets produced only a slight up-tick in revenues, from $328 million last year to $373 million. PC sales grew slightly in Japan, especially in the retail segment, although revenues overall were more or less flat, the officials said.

Stronger growth came from Canada, Brazil, the US and Europe, Maffei said.

Government tax incentives in Sweden designed to encourage PC adoption, and the availability of fairly powerful, affordable PCs on German supermarket shelves helped drive strong growth in Europe.

Looking ahead, revenues in the third quarter could be down as much as $300 million sequentially, thanks to seasonal slowness, economic troubles overseas and the possibility that companies will "lock down" on IT software spending in preparation for 2000, Maffei said.

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