Microsoft beats expectations

Microsoft (MSFT) today posted second-quarter results that beat expectations as its performance continued to be fueled by sales of Windows 95 and Office 97.

Investors received no upside surprise, however, from improved sales of Back Office and an improved outlook for the current and following quarter, analysts said. Back Office is viewed as a source of future growth for Microsoft.

Additionally, the continuing economic turmoil in Asia likely will temper Microsoft's business going forward.

Greg Maffei, the software giant's chief financial officer, offered a mixed outlook on the company's third and fourth quarters.

"I expect that the next quarter's revenue will be up slightly from this quarter's. Most geographies do look better, but Asia looks considerably worse," he said. "Combined with lower spending and marketing, I expect that [earnings per share] will be up from this quarter's 85 cents."

Maffei said that he expects fourth-quarter revenues and earnings to be down slightly from the previous quarter, but noted that earnings may be consistent with the earnings of the second quarter.

The software giant posted net income of $1.13 billion, or 85 cents a share, for the quarter, compared with earnings of $741 million, or 57 cents a share, a year ago.

Analysts expected the company to report earnings of 82 cents a share, according to First Call.

Revenues for the quarter rose to $3.59 billion, up from $2.68 billion a year ago.

Office 97, which initially got off to a slow start, has continued to experience strong sales--for much longer than Wall Street had expected. Windows 95 also got a boost in the quarter, from retail holiday sales, analysts said.

Microsoft, which historically has given Wall Street a conservative outlook on its future financial performance, previously had indicated that the second quarter, as well as the third and fourth quarters, would see little year-to-year growth. In this second quarter, however, the company showed a 34 percent growth in revenues.

"People were looking for 30 percent growth in [the second quarter]," said Esther Schreiber, an analyst with Credit Suisse First Boston. "And they are expecting little year-to-year growth in the [third] quarter. I think they will grow 15 percent in the [third] quarter and 17 percent in the fourth."

Meanwhile, Back Office has shown flat sequential growth for the past three quarters, Schreiber said. Additionally, revenues for the company's business systems group, which includes Back Office, marked another quarter of flat growth.

"Revenue growth was down slightly from the September quarter but not materially," Maffei said.

He added, however, that Microsoft is trying to focus on growth in licensing--rather than on revenues for its business systems division--given that the company thinks it's a more meaningful measure of its success.

Maffei said the company had a 45 percent growth in NT servers and a 79 percent growth in NT client access licenses.

Microsoft's business overseas saw European revenues climb 33 percent over last year, while Asia was down 8 percent sequentially.

"We are at risk [in Asia ] for what I call a triple whammy," Maffei said, citing reduced processor shipments, reduced revenue per PC, and lower rates of exchange against the U.S. dollar.

He added that the Far East and Southeast Asian countries represent 13 percent of the company's revenues. The effects of the economic turmoil in Asia could result in Microsoft's business plan for those regions falling short by $300 million--causing a potential revenue dip by as much as 15 cents over the next two quarters.

Going forward, Microsoft is looking to roll out Windows 98 in the springtime, despite efforts by the Department of Justice to require the software giant to give computer makers the option of offering their boxes with or without Microsoft's Internet Explorer browser. The case currently is winding its way through federal court, and the software giant will be called to defend itself in a contempt of court hearing tomorrow. The hearing centers on whether Microsoft followed a judge's preliminary injunction, which prohibits Microsoft from tying the sale of Windows to any other application.

NT 5.0 is expected to go into final beta this summer, and may ship toward the end of this year or in early 1999.