Salomon Smith Barney - 4/23/99:
- as you can see, they're expecting some strong upside from MSFT's upcoming product releases. No mention of lawsuit which will be a counter balance.
note on the "1M" - means "Buy" - on a scale of 1 to 5
& "M" means "moderate risk"
News of the Week Microsoft (MSFT, Buy -1M)
Microsoft reported EPS of $0.35, above our estimate of $0.33 and consensus estimates of $0.32. The company generated revenue of $4.33 billion, essentially in line with our estimate of $4.28 billion, and unearned revenue on the balance sheet of $4.2 billion in line with our estimate, which we believe was well above consensus estimates. The earnings upside in the quarter was driven primarily by lower than anticipated growth in research and development expenses, which were about $75 million below our estimates. The company's operating margin of 51.5% was well above our estimate of 50.8% and up from the 51.1% operating margin achieved in the same quarter a year ago. With revenue growing much faster than costs, operating margins are improving, a trend we see continuing. Significant potential upside in revenue estimates exists from the release of Office 2000 and a new version of BackOffice. We believe that several factors are at play, giving Microsoft a great deal of confidence: 1) enterprise license agreements provide a very predictable and recurring revenue stream, 2) the company expects very healthy PC unit shipments, particularly to consumers in the fourth quarter, with lower PC prices being positive for Microsoft, 3) lots of insurance on the unearned revenue line on the balance sheet, 4) a likely upgrade to Windows 98 in the third or fourth calendar quarter, 5) the continued shift to higher priced Windows NT Workstation from Windows 98, and 6) continued momentum with SQL Server and Exchange.
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