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Analysts scope Microsoft

When the giant reports its fourth-quarter results, Wall Street will focus on key information such as how its deferred revenue is shaping up.

    When Microsoft reports its fourth-quarter results today, Wall Street will focus on key information such as how its deferred revenue is shaping up and how many enterprise license agreements the giant is entering.

    Analysts, who say Microsoft is notorious for its conservative financial guidance, will be looking for anything that might shed light on the future financial performance of one of the world's largest companies.

    John Puricelli, A.G. Edwards' technology analyst, said Microsoft is famous for not releasing much information beyond its financial results for the quarter once it ends. The software giant is expected to be more forthcoming about product sales and other information at its regular analyst meeting in Redmond, Washington, next week, however.

    "We'll be looking at See special report:
Cracked Windows the deferred revenue line and how much greater that is for Windows 98, because deferred revenue becomes real revenue in the future," Puricelli said. "Microsoft won't come right out and say they've sold X number of copies of Windows 98. You have to get that information from third-party sources and third-party sources are saying it is selling pretty well."

    Windows 98 was released June 25, near the end of company's fourth fiscal quarter, and has surprised analysts with its strong sales. Much of those revenues won't be realized until 12 to 18 months down the line, however, under a complicated sales formula that includes software licensing agreements with large companies and vendors.

    Wall Street expects Microsoft to post earnings of 48 cents per share, according to First Call. That would be up from 40 cents per share in the fourth quarter of last year, but down from 55 cents per share that was posted in the third quarter this year.

    Esther Schreiber, an See special report: Microsoft sued analyst at Credit Suisse First Boston, said she will be looking at "the progress they've made in signing these enterprise license agreements.

    "In my mind that's the key to Microsoft in the next year," she added. "If they've been successful that means Microsoft can continue to grow without even introducing new products--and you know they will."

    Schreiber said the license agreements, which lock in bulk sales to large companies, will offset any delays in the shipment of Windows NT 5.0.

    And although the software giant is known for its conservative financial projections, "Windows 98 is clearly exceeding expectations," she said.

    The company doesn't want any more attention than it's already gotten in the past year. The Justice Department and state regulators are suing the company for alleged antitrust violations. But that hasn't affected the giant's stock price, which is up significantly since the Windows 98 release and is trading near record levels.

    Microsoft shares were holding steady today at 117.6250 in midday trading. The stock has traded as high as 118.75 and as low as 59 in the past 52 weeks.

    "I always like to take a peek at the unearned revenue stream," said Thomas Hensel, vice president of research on enterprise software at Everen Securities. "If those numbers go down--I don't expect they will--that's a big warning sign that something's wrong or slowing sales."

    Hensel expects Microsoft executives to be predictably conservative --"doom and gloom," he said.

    "I think they'll pound the table a little harder than normal today, especially considering where the stock's at," he said. "[The high valuation] puts pressure on them to keep performing. They still keep beating the numbers by a couple cents, but they're concerned that people will sour on their stock if they don't."

    Salomon Smith Barney analyst Neil Herman said today that he expects Microsoft will beat the consensus by about two cents, Reuters reported.

    Hensel said Microsoft's outlook looks good for the second half of the calendar year on Windows 98 sales, and he expects the company's server group of products including Windows NT 4.0, BackOffice, and the anticipated release of SQL Server 7.0, Microsoft's powerful database management application, to carry revenues.

    Reuters contributed to this report.