How is a company supposed to post record earnings at the same time as it is trying to fend off charges of being a monopolist?
Microsoft walked that tightrope when it posted big first-quarter earnings Tuesday that blew past analysts' expectations by 7 cents a share. The company also disclosed that it holds more than $17 billion in cash--and no debt.
Although Wall Street cheered the news, it may have been an awkward time for the software giant to report its highest quarterly profit since it went public in 1986.
The earnings announcement came as Microsoft was wrapping up the first week of its high-profile antitrust trial in Washington. The software giant is defending itself against the Justice Department (DOJ) and 20 states, which charged the company with antitrust violations in May. They aim to prove that Microsoft illegally used its operating system dominance--its market share stands at about 90 percent in that space--to win business in other software markets. Microsoft denies any wrongdoing.
In detailing the earnings results this week, Microsoft attributed much of the latest profits to its newly released Windows 98 operating system. The company chose to characterize the record profits as a sign of good times in the high-tech industry--not only for Microsoft but other software, PC, chip, and even Internet companies.
"We had a great quarter and are very pleased with the results, but our results are not unique," explained Microsoft chief financial officer Greg Maffei in a conference call with Wall Street analysts. "Despite fears that tech companies would miss earnings estimates this quarter due to world economic issues, contrary evidence is mounting."
"It appears that many of the innovative companies and adaptive companies in the tech market are doing well in a difficult environment," Maffei added.
He then rattled off a laundry list of companies--including Microsoft competitors--that are doing well. "The six largest software companies--Adobe, BMC Software, Citrix, Oracle, SAP, and Sybase--that have reported, all beat their estimates," he said. "Three out of four Internet companies have beaten their estimates, with the fourth matching estimates. And the eight reporting hardware and chip companies have all beaten estimates.
"The PC business is prospering," Maffei concluded.
As for Sun and Apple, he said: "Many operating system vendors besides Microsoft are doing quite well. Our partner, Apple Computer, shipped 278,000 iMacs in the product's first six weeks, making iMac the fastest-selling Macintosh ever. Sun [Microsystems] also reported good numbers."
Many Wall Street analysts agreed with Maffei's sentiments, but they point to some differences that make Microsoft stand out in a league of its own. Except for Microsoft, none of the other tech companies mentioned reported record earnings, and the majority of Net companies remain unprofitable. One of the companies, Adobe, has been a takeover target from a much smaller competitor, Quark, because of weak financials. In addition, Microsoft's cash reserves blow away those of its competitors, putting the giant in a position to buy them outright, at least in theory.
Microsoft also didn't mention that Netscape Communications posted better-than-expected results for its latest quarter as well. In defending itself against antitrust allegations, Microsoft has long argued that it was Netscape's inferior technology and management blunders that led to increased use of Microsoft's Internet Explorer browser--not illegal activities by Microsoft.
"I think the reasons they mentioned these other companies were twofold," said Mark Specker, an analyst with SoundView Technology Group.
"One spin is they hated to turn in such a massive quarter while the government was accusing them of being monopolistic," Specker said. "I don't think it will have much impact on their DOJ case, but it may have a slight impact on the court of public opinion.
"The DOJ has some pretty bright minds, and they'd be likely see through it as fast as anyone else," he added.
Maffei could not be reached for comment following the analysts' conference call, but a company spokeswoman denied any spin control was at play. "I think this was Microsoft giving guidance to the Street that the tech sector is looking good, despite the fact that Nasdaq stocks took a beating in recent weeks [due to global concerns]," said Caroline Boren.
As for the future, Microsoft offered its typical cautionary note, an inside joke among many analysts because it often proves unwarranted. But this time, Microsoft's statement appeared more bullish than usual. "While we are characteristically cautious about the period ahead?current results for Microsoft do not suggest an economic meltdown [in Asia]," the company said.
Maffei's comments during the conference call may not have been intended to draw any attention to Netscape's financial outlook, but Microsoft's relationship with Netscape is at the heart of the government's antitrust case against the software giant. Netscape chief executive Jim Barksdale has spent three days on the stand in Washington as the government's first witness.