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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: Jean M. Gauthier who wrote (14591)	1/19/1999 1:49:00 PM
From: William Hunt	Read Replies (1) \| Respond to of 74651

THREAD --- Very informative on expected earnings--- Silicon Valley Jan 19, 1999 Just Another Blowout Expected from Microsoft By Medora Lee Staff Reporter SAN FRANCISCO -- Another quarter, another blowout. That's what investors have gotten used to with Microsoft's ( (Nasdaq:MSFT - news) ) earnings, and the most recent quarter looks no different. Analysts surveyed by First Call forecast second-quarter earnings of 59 cents a share, but investors expect the Redwood, Wash.-based software giant to beat that by 2 to 5 cents when it reports after the close today. In its fiscal first quarter, Microsoft exceeded expectations by 7 cents, earning 56 cents per share. In each of the four quarters before that, Microsoft beat the Street's estimates by a penny or two, according to data from Baseline. Greg Maffei, Microsoft's chief financial officer, also said after the first-quarter release that he expected revenue in the December quarter to rise 20% from the year-ago level, with earnings per share from operations up 35%. Based on that, analysts boosted second-quarter estimates to the current 59 cents per share from 52 cents. Now they expect even more. "Microsoft has done a great job of always doing better than expectations," says Michael Hahn, a Pilgrim Baxter fund manager who owns some Microsoft shares in his portfolio. "They know how to set the bar low enough to deliver upside surprises." Some of the main revenue drivers in the quarter included extremely strong PC shipments and strong Windows 98 sales, analysts say. Lower prices have fueled PC shipments, yet Microsoft's royalty payments from software on a per-computer basis are unchanged, notes analyst Neil Herman at Salomon Smith Barney, which hasn't performed underwriting for Microsoft. Herman forecasts that original equipment manufacturer revenue, or revenue from PC software royalties, tallied $1.5 billion in the quarter, but he says this estimate could prove low given the strength in PC demand and the move toward Windows NT workstations. He predicts quarterly more than 21% to $4.3 billion and that earnings per share will hit 59 cents. Morgan Stanley Dean Witter analyst Mary Meeker wrote in a report that she expects OEM revenue, which happens to be Microsoft's highest-margin business, will rise further this year when Microsoft releases Windows 2000 (formerly called Windows NT 5.0). Morgan Stanley has performed underwriting for Microsoft. After Windows 2000 was delayed last year, many analysts pushed back their expectations for the launch date into late 1999 or later. But Credit Suisse First Boston analyst Mike Kwatinetz has stuck to his forecast that Windows 2000 will ship this summer "and become the most important Microsoft product since Win 3.0 in 1990. ... Windows 2000 should eventually become the corporate desktop standard." Once that happens, Kwatinetz believes Microsoft's OEM revenue can continue growing at a 25% to 30% clip for at least the next few years. Credit Suisse First Boston hasn't performed underwriting for Microsoft. For the December quarter, Microsoft is expected to report that the other main source of revenue came from Windows 98 sales, which Microsoft said were particularly strong in Japan and Europe in the September quarter. Salomon's Herman says demand for Windows 98 was robust again in the December quarter, though it came from the U.S. "In the December quarter, we have been projecting about 2.7 million units sold at retail," he says. "However, our sources indicate that software demand at retail overall has been very strong ... if Microsoft shipped 1 million more units than we estimate, it would add about $50 million in incremental revenue." Some analysts also expect to see positive signs from Microsoft's Internet business in the December quarter. Meeker notes that "the company's Internet efforts are showing very impressive statistics. The company is now the number three network on the Web (in terms of reach behind America Online ( (NYSE:AOL - news) ) and Yahoo! ( (Nasdaq:YHOO - news) ).)" The major risk with Microsoft right now remains the Justice Department's case against Microsoft, accusing it of being a monopoly. But fund managers say even that can work to Microsoft's advantage in coming months. Pilgrim Baxter's Hahn says he bought some Microsoft shares last autumn "because as we go through the trial, Microsoft will get to present their side, and that [positive spin] could drive the stock higher." BEST WISHES BILL