US Report: Microsoft delivers, ups earnings expectations

Microsoft Corp. might be in hot water with the Justice Department, but it's doing just fine on Wall Street.

Microsoft Corp. might be in hot water with the Justice Department, but it's doing just fine on Wall Street. On Tuesday the software giant easily topped Street estimates in its first fiscal quarter, returning a profit of $1.52bn (£.92bn), or 56 cents a share, on sales of $3.95bn (£2.40bn).

First Call consensus pegged the firm for a profit of 49 cents a share in the quarter. Including a $160m (£97.56m) one-time gain on the sale of Softimage, Microsoft had a profit of $1.68bn (£1.02bn). The $3.95bn in sales represents a 26 percent gain versus the year-ago quarter when it made $959m (£585m), or 36 cents a share, on sales of $3.13bn (1.9bn). Company officials credited stronger-than-expected sales in Europe and Asia and strong demand for its Windows 98 software for the upside surprise.

Microsoft sees more strong quarters ahead. In a conference call with analysts Tuesday, CFO Greg Maffei said second quarter earnings and sales will be up sequentially. Current second quarter consensus estimates of 52 cents a share are "at least a nickel light," according to Maffei. In the third and fourth quarters, Maffei said earnings will be flat to up slightly from second quarter levels. "Revenue in the second quarter will be up about 20 percent over year-ago totals," said Maffei. "EPS will be at least 35 percent from a year ago."

That rosier-than-usual assessment is sure to cheer investors, who have been trading Microsoft shares over concerns about the company's battle with the Justice Department. Microsoft (financials) shares closed off 2 11/16 ahead of the earnings report, but were gaining in after-market trading.

Maffei said despite fears that tech companies would struggle because of global economic conditions, the earnings in the sector are strong. "The PC business is prospering," he said. "The results don't suggest an economic meltdown."

That PC demand fuelled Microsoft results. "Demand was stronger than anticipated due to the successful launch of Windows 98 in Japan and several European countries," said Maffei. "While revenue growth has slowed in Office 97, the product continued to post strong results and customer adoption of Windows NT Workstation is at an all-time high."

Since its launch in June—with very little fanfare compared to the Windows 95 debut—more than 10 million customers either upgraded to Windows 98 or bought a new PC running the operating systems software. Analysts had expected Microsoft to post solid earnings this quarter as several PC and hardware firms had already reported better-than-expected earnings in the quarter.

"Given Intel's and Compaq's results, Microsoft should do just fine," said Art Russell, an analyst with Edward Jones. "They are aligned pretty closely with the PC industry. Demand for NT remains strong and Windows 98 is doing well."

Despite the optimistic outlook, Maffei said there were some potential glitches that should keep Wall Street from getting carried away with expectations. The CFO said NT business should continue to be strong, but marketshare gains will slow because of Year 2000 spending and the introduction of Novell's latest release of NetWare. In addition Asia is still a concern. "Business in Asia is a mixed bag," said Maffei. "Japan was just OK despite the launch of Windows 98 and Mac Office."