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To: Clint E. who wrote (22180)	7/21/1999 1:48:00 AM
From: Clint E.	Read Replies (1) \| Respond to of 69835

Microsoft squelches new-stock rumor - for now by Jay Greene Seattle Times technology reporter Microsoft Chief Financial Officer Greg Maffei has poured cold water on Wall Street expectations that the software giant might create a so-called "tracking stock" within the next few days to reflect the value of its Internet operations. Maffei made the comment yesterday during his quarterly conference call with analysts, recapping Microsoft's financial performance. In what has become standard operating procedure, Microsoft again beat analysts' expectations, earning 40 cents a share in the fourth quarter, compared with 25 cents a share a year earlier. The consensus among analysts was that Microsoft would earn about 36 cents a share. Maffei went out of his way to discount rumors that Microsoft was on the verge of creating a tracking stock soon, which would allow the company to separate its Internet businesses from its other operations when it comes to the stock market. The Internet operations at big companies such as Microsoft often don't reflect the lofty Wall Street prices of companies whose entire focus is on the Internet. A tracking stock would let Microsoft separate the sexier business. In essence, the sum of the parts would become greater than the whole. To create a tracking stock, Microsoft would need approval from shareholders. The company then could sell it through an initial public offering or distribute shares as a dividend to shareholders. "We are reviewing such a structure but have no imminent plans to announce such a structure," Maffei said. When pressed on the word "imminent," Maffei declined to be more specific. Analyst Andrew Roskill of Warburg Dillon Read took that as a sign that Microsoft will eventually create a tracking stock, which he thinks will benefit shareholders. "Microsoft will do a tracking stock," Roskill said. "In the big picture, what does it matter if it's in two or three days or two or three months?" The quarterly earnings report Reports last week that Microsoft would announce a tracking stock as early as this week sparked a 5 percent surge in Microsoft's shares Friday. Roskill expects the stock to now give back some of those gains. Microsoft's financial performance in the quarter, though, didn't give investors a reason to back away from the stock. For the fourth quarter, Microsoft profit jumped 62 percent from the same quarter last year, to $2.2 billion on sales of $5.8 billion, a 39 percent increase. For the year, earnings grew 73 percent to $7.8 billion on sales of $19.7 billion, a 29 percent gain. Microsoft finished the quarter with $17.2 billion in cash. That's after spending more than $6 billion of the $21.8 billion cash hoard it had amassed by the end of the third quarter. The company, in other words, managed to recoup roughly a third of what it spent in the fourth quarter. While Maffei said the 39 percent quarterly growth in revenue was probably not sustainable - it was aided by a handful of one-time gains - he still expects the company to grow 20 percent or more in the current quarter. For the fiscal year that ends June 30, 2000, Maffei expects revenue growth "in the high teens." He also encouraged analysts to maintain their current earnings projections, which place growth at about 8 percent. Why the quarter was strong The fourth quarter was buoyed by strong sales from Office 2000, the suite of applications that Microsoft launched June 10. Microsoft didn't break out results specifically for Office 2000, but sales in its Productivity Applications and Developer business division - the lion's share of which are Office 2000 - jumped 48 percent to $2.9 billion in the quarter. The quarter also benefited from some accounting changes and one-time gains. Most notably, Microsoft gained $250 million from a change in the way the company calculates products returned to retailers. Microsoft sales have evolved over the years away from retail sales of shrink-wrap products to selling licenses and subscriptions. Because such sales are rarely returned, Microsoft lowered the amount it estimated for future returns. Microsoft also added $200 million related to Office 2000 sales. The company offered coupons to customers who purchased Office 97 after Jan. 1 for free upgrades to Office 2000 when the product launched. Accounting standards required Microsoft to defer $400 million in revenue from those sales until customers cashed in those coupons. Microsoft added some of that revenue in the fourth quarter and will add the remainder in subsequent quarters. Microsoft's biggest hit - a one-time $217 million charge - came from a change in the way it offers employees stock options. Racking up legal expenses Maffei said that the 132 percent jump in general and administrative costs to $297 million came largely from legal expenses, including one-time charges. Maffei said general and administrative costs will likely fall to $150 million in the current quarter. He didn't specifically link those legal fees to the federal government's antitrust case against the company, but those bills are likely to shrink since the testimony phase of the trial ended last month. As is his style, Maffei was cautious looking ahead. Personal computer sales, which were unexpectedly strong in Asia and Europe, will likely decline, he said. Companies will probably curb their spending in the second half of the year as they prepare for potential problems related to the year 2000. All of this should slow Microsoft's profit margin, which stood at an eye-popping 38 percent for the quarter. None of which concerned analysts much. "They came in a penny or two above estimates and they maintained the gloom and doom," Roskill said. "So it was a pretty typical quarter."