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Microsoft posts stellar earnings

As it defends itself in a landmark antitrust trial in Washington, the giant kicks off its 1999 fiscal year with better-than-expected earnings.

As it defends itself in a landmark antitrust trial in Washington, Microsoft kicked off its 1999 fiscal year yesterday by reporting better-than-expected first-quarter earnings.

The stock closed more than 2 percent lower yesterday ahead of the news, but jumped higher when the markets opened this morning. Microsoft shares, which have traded as high as 119.625 and as low as 59 during the past 52 weeks, were up 3.43 percent to 103.69 in early trade today.

Excluding extraordinary items, the company reported income of $1.52 billion or 56 cents per share, compared with income of $959 million or 36 cents per share posted a year ago.

Financial analysts expected the company to post profits of 49 cents per share, according to First Call.

The profits were highest quarterly net income reported yet by the company since it went public in 1986, a Microsoft spokeswoman confirmed.

Known for downplaying its financial success and providing Wall Street with cautious guidance, Microsoft topped even the most ambitious of estimates. The high end of estimates was 51 cents per share.

The software giant's market value rivals that of General Electric and it is flush with cash. It had $17.2 billion in cash and short-term investments as of September 30--and no debt.

Including a $160 million gain from its sale of multimedia tools maker Softimage, the software giant posted net income of $1.68 billion or 62 cents per share, compared with net income of $663 million or 25 cents per share reported for the like period a year ago, which included a charge for the company's acquisition of WebTV Networks.

Microsoft's quarterly revenue rose to nearly $4 billion from $3.1 billion last year.

"Demand was stronger than expected due to the successful launch of Windows 98 in Japan and several European countries," Microsoft chief financial officer Greg Maffei said in a statement.

The company said it has sold more than 10 million copies of its upgraded Microsoft at a glance Windows 98 operating system since it was introduced in late June.

Despite the strong demand for Windows 98, revenues in Japan were flat and revenue from Southeast Asian nations decreased, the company said. Revenue in the Asia region fell 11 percent from year-ago levels for the quarter ended September 30.

"While revenue growth has slowed in Office 97, the product continued to post strong results, and customer adoption of Windows NT Workstation is at an all-time high," Maffei said.

Analysts said this week they would be looking at factors including Windows NT Workstation sales to determine how strong Microsoft's revenues will be in the future as it attempts to migrate users to the NT platform.

The company said its platforms' product revenue, including Windows 95, Windows 98 and Windows NT Workstation, grew 38 percent in the first quarter.

Executives said they expect the third beta of Windows NT 5.0 to be released sometime during the first calendar quarter of 1999, with shipment of the final product about six to nine months after that.

During the quarter, Microsoft revamped its portal site, MSN.com, and announced that it would add 24 country-specific sites by way of a $60 million deal with several search providers. The company's Hotmail free Web-based email service has 23 million active accounts and is adding 125,000 new accounts each day, executives said.

The company did offer its standard warnings: it is concerned about potential saturation in the desktop applications market for its Office products and that increased information technology spending on Year 2000 bug remediation efforts could hurt purchases of some Microsoft products. Executives also said they are watching Latin America closely for signs of softness.

Despite the ongoing Asian financial crisis, and the concern that companies and Wall Street have expressed about the impact of the Asian flu, however, Maffei said Microsoft's strong earnings are not unique.

"The PC business is prospering," Maffei said in a conference call. "Many [companies] are doing well in a difficult environment."

But when the No. 1 software maker posted fourth-quarter results in July, Maffei warned that first-quarter revenues likely would be down sequentially due to seasonal factors and the absence of the Windows 98 launch.

Last quarter the company posted revenues of $4 billion compared with $3.95 billion released today.

Executives said that its revenue growth rate is slowing and that it is unlikely the company's fiscal 1999 revenue growth rate will match that of fiscal 1998. However, they do expect total revenues to be slightly higher on a sequential basis for the second, third, and fourth quarters this year, largely due to seasonal factors.

"Revenue is likely to be up 20 percent year-over-year in the second quarter due to growth in the overall PC market, continued consumer adoption of the NT platform, and the growth in Back Office products," Maffei said on the conference call. "Growth will be strongest in Europe and weakest in Asia."

The company said it showed great cost controls this quarter. Research and development costs for the first quarter were $611 million, down $100 million from the June quarter, executives said.

Some analysts seemed to think the difference between the Wall Street consensus and the company's earnings stemmed from its cost controls more than from an increase in revenues.

"If we can continue to grow revenues at a reasonable rate, we will grow earnings at a good rate," Maffei said.

Microsoft's overall lack of pessimism prompted some to question why company executives were in such a chipper mood.

"It's a sunny day in Seattle, we don't get a lot of those," Maffei quipped.

The stock closed more than 2 percent lower today ahead of the news at 100.25. Shares have traded as high as 119.625 and as low as 59 in the past 52 weeks.