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SEATTLE: Software giant Microsoft Corp. on Wednesday posted a quarterly
profit that blew past expectations, powered by shrinking expenses, growing
investment gains, and momentum in its flagship product, the Windows 2000
operating system.
Microsoft, whose Windows software runs most personal computers, said its net
profit in its fiscal first quarter ended September 30 rose 18 per cent to $2.58
billion, or 46 cents a share from $2.19 billion, or 40 cents a share, a year
earlier.
Including a change in how it must account for some hedging activities, the
quarter's profit was 40 cents a share.
The Redmond, Wash.-based company was expected to show a profit of 41 cents a
share, according to estimates compiled by First Call/Thomson Financial.
Revenues totaled $5.8 billion, compared to $5.38 billion a year earlier.
Analysts said they were relieved that Microsoft did not spring any nasty
surprises on a market that has been battered by a string of bad news, diminished
expectations and profit warnings by other technology heavyweights.
"I was very encouraged," said Scott McAdams, president of
Seattle-based brokerage McAdams Wright Ragen. "If you were looking for bad
news, there just wasn't anything there."
Treat, not trick
The higher-than expected profit was surprising since most analysts had expected
the company to just meet estimates or perhaps top them by a penny or two at
most.
"In general, we feel good about the quarter. We came in with net revenue
slightly higher than we expected, and net expenses were slightly lower, so our
earnings per share got a bump in the quarter that was greater than what was
probably expected," Chief Financial Officer John Connors said in an
interview.
Investors sent shares of Microsoft up $4, or 6 per cent, to $55-3/4 in
after-hours trading. The stock has fallen from its high of $119-15/16 last
December. A component of the Dow Jones industrial average, the stock rose 2.6
per cent to $51-3/4 in regular trading on Wednesday amid a nearly 115-point drop
in the blue-chip index.
"I feel like we're out of the woods with the stock," McAdams said.
"The Street was extremely worried that they were going to downgrade their
number" for future earnings.
Although Microsoft didn't lower guidance, it gave typically conservative
forecasts for the rest of the year, saying it expected earnings for its full
fiscal year to come in "a few pennies higher" than the current
consensus analyst estimate of $1.88 per share due to the strong first quarter
performance.
"It seems likely that revenue will be up in the low teens on a
comparable basis, and up in the high teens sequentially. Operating income and
EPS (earnings per share) should increase in line with revenue growth,"
Connors told financial analysts on a conference call.
"If the trends that we see continue, we are on track with our full-year
expectations," Connors said.
Windows to take over from investments
Profits were also helped by higher gains on Microsoft's vast investment
portfolio, which earned $1.13 billion in the quarter, compared to $550 million a
year earlier.
About half of that was from two big transactions: the sale of its electronic
billing business TransPoint and the merger of Titus, a Japanese cable television
company in which Microsoft had a substantial stake, with a rival, Connors said.
Heaping more on the "plus" side of its balance sheet, Microsoft also
reported that it had a whopping $24.7 billion in cash or short-term cash
equivalents.
Microsoft consistently uses investment gains to help it meet profit targets,
analysts say. Such gains have increased in recent quarters, coinciding with a
lull in the company's product cycle as it waits for Windows 2000 to gain
traction.
Connors said both Windows 2000 and the Windows Me operating system for home
users saw strong sales in the quarter, and, addressing a key worry among
analysts, he repeatedly sounded a bullish note on Windows 2000, saying sales
were on track to meet internal targets.
"The best way to characterize Windows is in this quarter, if you take
the client and server and add them together, we had a record quarter. We're on
track with where we hoped Windows 2000 would be," Connors said.
Along with so-called server products such as the SQL Server 2000 database and
Exchange 2000 communications software, Windows 2000 forms the cornerstone of
Microsoft's new .NET strategy to weave the Internet into all its products.
"You've got clear evidence that Windows 2000 is getting traction and
that server products are gaining traction," McAdams said.
Cloud over Europe
One cloud over Microsoft's operations was Europe, where a weakening euro,
Europe's unified currency, was casting a shadow on PC demand and revenues,
Connor said.
"The weak euro is really hurting a number of technology companies and us
as well," Connors said, noting that Microsoft booked 8 per cent less
quarterly revenue in US dollar terms from Europe than a year earlier due to the
euro's slide.
PC demand in Europe is likely to remain sluggish because most machines were
built by US companies and priced in US dollars, making them about 25 per cent
more expensive to European consumers than a year ago.
However, Connors said that overall PC demand in the quarter had met
Microsoft's diminished expectations, but was not lower, as many analysts had
feared following warnings from other industry heavyweights such as chip-maker
Intel Corp. and PC maker Dell Computer Corp. .
(C) Reuters Limited 2000.