UPDATE: Microsoft Reports Strong Q2 Revenue

Microsoft Corp. today announced strong

second-quarter results for fiscal 2000, reporting revenue of US$6.1 billion for

the quarter ended Dec. 31, 1999. The software maker cited continuing demand for

its Office application suite and SQL Server database, along with growing demand

in Asia as contributing factors to its good financial showing.

Revenue for the second quarter rose 18 percent above the $5.2 billion reported in the same period a year ago, according to a company statement. Net income was $2.4 billion and diluted earnings per share were 44 cents, up 22 percent over 36 cents per share reported in the second quarter of fiscal 1999. Analysts polled by First Call/Thomson Financial had predicted earnings per share of 42 cents.

"We're quite satisfied," was the assessment of Microsoft's Senior Director, Planning and Reporting Jerry Masters, speaking on a teleconference this afternoon. He said that the results had been a mixed bag with strong performances from products such as Office coupled with lower demand for the company's operating systems, particularly on the desktop. Masters blamed the lower demand on uncertainty towards the end of last year surrounding the impact of the year 2000 problem which resulted in a drop-off in demand for business PCs.

Microsoft was particularly hit in its channels revenue from OEMs (original equipment manufacturers), Masters said, with revenue rising to only $1.9 billion in the second quarter of fiscal 2000 compared to $1.8 billion in the year-ago quarter.

However, the good news as far as regional revenue went was the continued recovery in Asia, where revenue rocketed 56 percent to $606 million in the second quarter of fiscal 2000, up from $389 million recorded in the same quarter a year ago. Revenue in the South Pacific and Americas region hit $2.2 billion, up 26 percent from last year's $1.7 billion, while revenue in Europe, the Middle East and Africa grew by 14 percent to $1.4 billion from $1.2 billion a year ago.

Breaking down the results by business divisions, revenue from the Windows platforms unit was almost flat at $2.4 billion compared with $2.3 billion for the second quarter of fiscal 1999.

Microsoft executives on today's conference call said the slowing in demand for the vendor's operating systems was also due to end-users -- particularly business users -- waiting for the release of the company's long-overdue Windows 2000 OS. Windows 2000 is scheduled for an official launch in San Francisco on Feb. 17, although some PC vendors are planning to ship systems with the new OS around Jan. 24. Masters said that 7,000 applications will be running on Windows 2000 come Feb. 17, and described the new OS as a "seminal product" for the company.

Turning to the productivity applications and developer division, revenue rose to $2.8 billion, up from $2.2 billion a year ago, particularly due to strong sales of Office in Asia. Microsoft's SQL Server database also performed well, Masters said, and the company's groupware product Exchange saw "steady revenue."

In Microsoft's consumer and other business unit, the star performer was the company's leisure and education business, Masters said. Overall, the unit saw revenue grow to $872 million, up from $708 million in the second quarter of fiscal 1999. He expects that the company's MSN Web portal will "hit its stride" in the coming year. According to Microsoft estimates, the company's instant messaging service now has more than 5 million users, Hotmail has over 50 million members, and its WebTV service has topped 1 million subscribers.

Today's conference call to discuss the financial results marked one of the first official duties of Microsoft's new chief financial officer, John Connors, who is only 11 days into his new role. His predecessor, Greg Maffei, unexpectedly resigned towards the end of last month to become chief executive officer of Vancouver, Canada-based Worldwide Fiber Inc. [See "UPDATE: Maffei Quits as Microsoft CFO," Dec. 22, 1999.]Looking ahead, Connors advised caution, predicting a gradual adoption of Windows 2000 over the coming year, with the impact of the new OS not being felt in revenue terms until the company's fourth quarter of fiscal 2000. He said Microsoft's platforms business will probably only experience growth in the low double digits for the third quarter. However, he was very optimistic that the launch of Windows 2000 will lead to an increase in NT deployment on laptop computers. As for the company's consumer business, he said that by the end of fiscal 2000 -- June 30 -- revenue should hit $1 billion.

Connors expects that Microsoft's research and development expenses will account for approximately 16 percent of its net revenue in the third quarter of fiscal 2000. In terms of earnings per share for the third quarter, he advised that analysts' predictions of 41 cents per share is the right figure to stick with.

Included in the company's second-quarter fiscal 2000 results is a one-time charge of around 3 cents per share for the settlement of an antitrust lawsuit with DR-DOS owner Caldera Inc. Microsoft and Caldera last week announced they'd reached an agreement to settle the case, which had been due to come to trial next month. [See "UPDATE: Microsoft Settles Caldera Antitrust Suit," Jan. 10.]In today's conference call, Microsoft's new CFO refused to be drawn on the actual amount of money the one-time charge of 3 cents per share equates to, which analysts have speculated amounts to between $250 million and $275 million. "I'm trying to avoid precision with that number," Connors said.

Caldera had been looking for $1.6 billion in damages from the lawsuit, which it filed against Microsoft in 1996, alleging that the software giant had abused its dominant position in the operating system market thus stifling the chances of DR-DOS being able to compete against Microsoft's operating system, MS-DOS.

Microsoft, in Redmond, Washington, can be reached at +1-425-882-8080, or at http://www.microsoft.com/.

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