It's good to be king.
Microsoft said Tuesday that first-quarter income surged a better-than-expected 58 percent on strong demand for Windows 98 and Windows NT. This comes as the company faces government scrutiny for alleged anticompetitive practices.
After the market closed, the world's biggest software company said profit from operations, not counting a gain for the sale of a division, rose to US$1.52 billion, or 56 cents a share, for the quarter ending 30 September. This compares to the previous year's profit from operations of $959 million, or 36 cents a share. Analysts were predicting 49 cents a share, according to research firm First Call.
Including a one-time gain of $160 million for the sale of SoftImage, a special-effects graphics unit, Microsoft's net income reached $1.68 billion. This compares to first-quarter 1997 net income of $663 million, which included a $296 million charge for the purchase of WebTV Networks.
Revenue rose 26 percent to $3.95 billion from $3.13 billion in the comparable quarter last year.
What's more, the company told analysts to increase their earnings forecast next quarter, signaling huge confidence by Microsoft executives in the company's prospects, analysts said. Next quarter, earnings per share from operations "should be up by at least 35 percent as compared to the year ago period," said Greg Maffei, Microsoft's chief financial officer during the after-earnings conference call. "It appears the consensus estimates from Wall Street are at least a nickel per share light."
Analysts said they were astounded by the company's performance.
Microsoft "shot the lights out," said Art Russell, analyst at Edward Jones. "This is probably one of largest upsides in a long time."
The Redmond, Washington, company reported its results on the second day of a historic antitrust case. The US Department of Justice alleges that Microsoft got to where it is by stifling competition and playing dirty tricks on its rivals. Microsoft has vehemently denied any wrongdoing.
During the conference call, Maffei portrayed the company's performance in light of better-than-expected conditions in the industry.
"Our results are not unique," he said. "Despite fears that tech companies would miss earnings, contrary evidence is mounting."
Maffei cited bitter rival Oracle, as well as Adobe Systems and Sybase as companies that beat their estimates.
"Many operating systems vendors besides Microsoft are doing quite well," said Maffei, praising "our partner, Apple Computer." He said the market affirmed that success, boosting Apple stock by 127 percent in the past year.
It was as if Microsoft was embarrassed by its own success, while competitors grumbled about getting crumbs off the king's table, analysts said.
Microsoft is "very careful in way they couch these things," Russell said. He said the context was "a way to soften" any conclusion that "Microsoft is putting everyone else out of business."
As usual, Microsoft executives told investors that its business is unlikely to sustain its current growth rate.
"The retail acceptance of Windows 98 was quite strong in Japan as it provided consumers with new functionality to upgrade their PCs," said Pieter Knook, Microsoft's regional vice president in Asia. "While we're pleasantly surprised by the strength of business this past quarter, the outlook remains tepid."
Even though revenue grew 26 percent this quarter from last year, "our revenue growth rates continue to slow down," said Jerry Masters, senior director of planning and reporting. He said the revenue growth rates of 18 percent in the third quarter, 26 percent in the fourth quarter, and 26 percent this quarter are "substantially lower than the growth rates of 45 percent, 41 percent, and 36 percent in the respective comparable quarters."
Revenue growth of the Office 97 package of business software has "slowed," but it still "posts strong results," Maffei said. Customer adoption of Windows NT Workstation "is at an all-time high," he added.
Since 25 June, 10 million customers either have purchased a Windows 98 retail upgrade or a new Windows 98-based PC, the company said.
Before the earnings announcement, Microsoft shares fell $2.68 to $100.25 a share.
