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Microsoft stock drops after earnings report

SEATTLE (Reuters) - Microsoft Corp. stock dropped Wednesday in heavy trading a day after the giant software company posted better-than-expected earnings, but sounded a note of caution on the future.

SEATTLE (Reuters) - Microsoft Corp. stock dropped Wednesday in heavy trading a day after the giant software company posted better-than-expected earnings, but sounded a note of caution on the future.

Microsoft was off 6-3/16 at 109-184 in morning trading on Nasdaq, where it was the most active issue with more than 24 million shares changing hands in the first two hours of trading.

Investors likely were disappointed at how much of Microsoft's quarterly profits came from its equity portfolio rather than sales, said Bill Meehan, the chief market analyst at Cantor Fitzgerald in Darien, Conn.

Although the stock was off, several Wall Street analysts raised their earnings expectations, upped their share price target, or reiterated strong buys on the company.

The world's largest software maker on Tuesday said its net income rose 22 percent to $2.44 billion, or 44 cents a diluted share, in its fiscal second quarter ended Dec. 31, from $1.98 billion, or 36 cents a share, a year earlier.

Excluding a special charge, the company earned 47 cents a share, vs. analysts' expectations of 42 cents a share, according to First Call/Thomson Financial.

Revenue climbed to a record $6.11 billion for the quarter, up 18 percent from the previous year's $5.20 billion. A surge in investment earnings and strong sales of its Office suite of software helped boost results.

``Microsoft made their numbers and did not change the guidance -- but they got there in a very different way than expected, which raises some doubts over the PC industry performance in the December quarter,'' PaineWebber analyst Don Young said in a report.

``Microsoft's OEM sales (sales to computer makers) were up 4 percent in revenues and 8 percent in units -- far below their guidance and expectations. However, a very strong performance in Office enabled Microsoft to slightly exceed (earnings per share) expectations,'' said Young, who raised his 2000 earnings per share estimate for Microsoft to $1.70 from $1.65.

``With an improving PC demand picture ahead of it and two powerful product cycles, Microsoft's fundamentals are likely to accelerate,'' Young said in the report, and reiterated a buy rating on Microsoft.

Credit Suisse First Boston analyst Michael Kwatinetz maintained a strong buy on Microsoft, but said in a report that, ``revenue was essentially in line, but OEM revenue was disappointing.''

Goldman Sachs analyst Rick Sherlund raised his 2000 earning per share estimate for Microsoft to $1.69 from $1.63, and Banc of America raised its share price target to $140 from $115.

After the earnings release on Tuesday, Microsoft sounded a cautious note as it prepared its biggest ever launch of a software product, its $1 billion Windows 2000 operating system aimed at businesses.

Microsoft's new Chief Financial Officer John Connors warned analysts not to get too excited about the short-term prospects for the new software, saying ``we remain cautious in our expectations for near-term PC demand and corporate software spending, and continue to anticipate moderate revenue growth through the remainder of fiscal 2000.''

But he was less restrained in forecasting the outlook for the company's critical Windows 2000 server product, which he said was getting strong acceptance and would experience ``a very, very good third quarter.''