From NY Times 1/20/99
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January 20, 1999
Microsoft's Profit Up 75% in Quarter
Strong PC Sales Cited; Cautious Forecast Given
By LAWRENCE M. FISHER
trong shipments of personal computers strengthened the second-quarter financial results of the Microsoft Corporation, which reported a 75 percent gain in earnings Tuesday, far exceeding the most optimistic projections of Wall Street analysts.
But officials at Microsoft, the world's leading maker of personal computer software. remained cautious in their outlook, citing concerns about the uncertainty of corporate spending on solutions to the Year 2000 computer clock problem, as well as continued financial crises in many markets.
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Microsoft reported its results after the stock market closed. In anticipation of a strong quarter, its shares rose $5.875, to close at $155.625, in Nasdaq trading. The good news sent Microsoft shares up further in after-hours trading, where they sold as high as $163.25.
Once again, Microsoft's financial performance eclipsed worries about the effects of the Justice Department's antitrust suit.
"It was classic Microsoft: Blow the numbers out and then tell everybody why you won't do it again this quarter," said Rick Sherlund of Goldman, Sachs. "The second half of calendar 1999 they didn't say anything about because they really don't know. That's the tougher call."
Analysts have grown accustomed to Microsoft's pattern of greatly exceeding their quarterly estimates, only to have the company's executives offer a sobering outlook based on perceived threats to its continued prosperity. Those executives attributed the second quarter's strong performance to what was for some people an unexpected surge in personal computer sales, which in turn drove sales of the Windows 98 and Windows NT operating systems.
"Reports of the death of the PC turned out to be greatly exaggerated," Greg Maffei, Microsoft's chief financial officer, said in a conference call with securities analysts from headquarters in Redmond, Wash. He noted that in October, when many predicted a slowdown, Microsoft, rather than offering its usual gloom, forecast strong growth. "However, results also spiked due in part to demand caused by Year 2000 concerns," he said.
"Reports of the death of the PC turned out to be greatly exaggerated."
Greg Maffei, Microsoft's chief financial officer
"We remain guarded about growth in 1999," Maffei said. In the current quarter, he said, it seems likely that revenue will decline by at least $300 million from the one being reported yesterday. Although Microsoft's operating earnings will be up 25 percent year over year, and analysts' current estimates are 2 or 3 cents short, Maffei said earnings will be down compared with the second quarter.
"That's his guidance," Sherlund remarked. "Whether we want to follow it is another question. They certainly are steering the Street toward slower growth."
For the quarter ending on Dec. 31, Microsoft reported earnings of $1.98 billion, or 73 cents a diluted share, up 75 percent from $1.13 billion, or 42 cents a share, in the comparable period a year earlier. Revenue rose nearly 38 percent, to $4.94 billion, over the $3.585 billion reported in the second quarter of fiscal year 1998.
Analysts had expected Microsoft to earn 59 cents a share, according to First Call.
Unearned revenue, the portion of sales Microsoft sets aside to reflect the long-term use of many of its products, grew to $3.37 billion, from $3.13 billion in the first fiscal quarter.
On a cautionary note, Maffei said that conditions in Asia, Latin America and Russia remained tough, and that the company did not see a timely end to the difficulty in those markets. "We're talking about a whole segment of the globe," he said. "It's a strange situation. The developing countries are growing slowest while the mature markets, like the U.S., are growing fastest," he said. "Obviously it can't continue, but we don't see how it will end."
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