Microsoft Narrowly Beats Earnings Estimates

FRAMINGHAM (07/19/2000) - Microsoft Corp.'s fourth-quarter results came in close to what analysts had been expecting, reassuring the market after a negative surprise in the third quarter. The company earned US$2.41 billion on revenue of $5.8 billion for the quarter ended June 30.

Microsoft's earnings per share were 44 cents, narrowly beating the 42-cents-per-share average estimate of analysts polled by Boston-based First Call Corp. "After a quarter with a negative surprise, a quarter with no surprises is a good thing," said Chris Mortenson, an analyst at Deutsche Banc Alex. Brown Inc. in New York.

Revenue growth was flat compared with the same quarter last year, when the company saw revenue of $5.76 billion and net profit of $2.2 billion. Microsoft had warned about slowing growth when it announced the results of its previous quarter. Executives said last year's results were affected by the successful launch of Office 2000 and other factors, making the numbers difficult to compare.

For the fiscal year ended June 30, Microsoft saw net income of $9.42 billion on revenue of $22.96 billion, an increase of 16 percent over last year's figures.

Though lower than Microsoft's historical growth figures, 16 percent is an impressive number given Microsoft's size, said Art Russell, an analyst at Edward Jones in St. Louis. "It amounts to adding several Yahoo [Inc.]'s in a year," said Russell.

In a conference call Tuesday night, Microsoft executives were generally upbeat.

Microsoft Chief Financial Officer John Connors said weak sales of business PCs had a negative impact on revenue for the quarter. But in the current first quarter, Microsoft expects business PC sales to improve and that the launch of Windows 2000 Service Pack 1 [expected later this summer] will "further accelerate Windows 2000 adoption," he said.

However, Connors said last year's first quarter was aided by strong pre-Y2k buying. He told analysts to expect only modest 5 percent revenue growth for the quarter compared with the previous year, and a 3 percent drop in revenue sequentially. For fiscal 2001, the company now expects to see 15 percent revenue growth.

In the past month, Microsoft has addressed two issues that had been worrying analysts: the industry's move away from the PC toward Internet appliances and the rising popularity of hosted software. On June 22, Microsoft announced its .Net strategy, and last week the company introduced monthly subscription prices aimed at Application Service Providers for most of its products.

The .Net road map is reassuring the market in two ways, said Mortenson. "It's reassuring because No. 1, they have a strategy, and No. 2, it is based on industry standards, which is where they need to be right now."

Microsoft executives said the move toward software subscriptions will not affect sales in fiscal 2001. And analysts said that, long-term, this evolution is likely to be neutral or will be slightly beneficial to Microsoft's earnings.

Microsoft stock is still lower due to concerns about the antitrust trial, slow Windows 2000 sales and concerns about the company's position in the emerging market for Internet appliances, Russell said. But he added that he believes Windows 2000 will take off after the shipment of Windows 2000 Service Pack 1, Windows 2000 Datacenter and a number of server applications to speed adoption of Windows 2000 in coming quarters.

"If you want to buy an industry leader at this point, you can either buy Oracle at 100 times earnings, or you can buy Microsoft at 40 times earnings,'' said Russell, who rates Microsoft's stock a Buy. Mortenson said he is "cautiously optimistic" about the stock.

Microsoft shares closed up 0.4 percent before the earnings were announced. The stock was trading slightly higher in after-market trading Tuesday.

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