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Microsoft profits stun analysts

Strong Office 97 sales propel Microsoft to far exceed Wall Street's estimates.

Buoyed by strong sales of Office 97, Microsoft (MSFT) dazzled Wall Street today by reporting a dramatic 80 percent increase in earnings.

The company announced net income of $1.04 billion and earnings-per-share of $0.79 for the quarter ending March 31, 1997. That compares to $0.44 per share for the same quarter last year. The results far exceed analysts' consensus estimate of $0.64 per share, as reported by First Call.

Revenues for the quarter totaled $3.21 billion, a 45 percent increase over $2.21 billion last year.

"Worldwide acceptance of Microsoft Office 97 ignited these outstanding results," said Mike Brown, chief financial officer of Microsoft in a statement. "As corporate and retail customers upgraded to this new product with enthusiasm, we also realized solid gains in the OEM channel because of the continued popularity of the 32-bit Windows operating systems. And we reaped the benefits of an improved cost model."

Introduced last January, Office 97 is Microsoft's suite of desktop productivity applications, including Word, Excel, and PowerPoint. Microsoft said that it has sold more than 8 million licenses for Office 97 applications.

The company says there are now more than 60 million Office users, 8 million of whom are using Office 97. The company also says that Office 97 is selling at three times the rate of any previous version, despite speculation in the press when the product came out that it was too large and had many unnecessary features.

Today, analysts were still shocked that Microsoft's exceeded their expectations so dramatically.

"I knew it was going to be strong, did I know it was going to be 79 cents? No," said Robbie Owens, an analyst at Pacific Crest Securities in Portland, Oregon. "79 cents was unfathomable."

"They blew everybody away," said Scott McAdams, an analyst at Ragen MacKenzie in Seattle, Washington. "The real star here was the platforms division despite the fact that it got second billing. If you look at growth rate in units, platforms was the real star."

But Microsoft's Brown also sounded a cautionary note about future growth, a warning that it issued last quarter as well. Specifically, the company warned that demand for its productivity applications and Windows 95 will slow down in the coming fiscal year because the company will not release a major upgrade of those products until fiscal 99.

"With our main revenue engines--Windows and Office--idling at a [yellow] light in the product cycle in fiscal 98, growth will be more dependent on our nascent server business," Brown said. "And while business has been very strong, there is FUD [fear, uncertainty, doubt[ out there now, FUD about important issues we are working very hard on."

The company--and, in particular, Brown--is always careful to control expectations for Microsoft's continued revenue growth and then blow away analysts' projections. Today, Brown--who quoted Francis Bacon and Ralph Waldo Emerson in a call with press and analysts--used a colorful metaphor to describe his feelings for Microsoft's financial performance.

"I am a raging bull about Microsoft's long-term financial prospects," he said. "But all the same, it's hard for even the wildest bull that ran the streets of Pamplona?to imagine another quarter as incredible as the sizzler we just finished."

Microsoft has scouting out new growth opportunities and has begun making significant strategic investments in building media operations that could eventually bolster revenues.

"I don't think there's much concern over near-term demand," said Christopher Galvin, an analyst with Hambrecht and Quist. "There is more concern about how they're going to telegraph demand over the next few quarters."

Earlier this month, Microsoft made another investment to drive future growth by acquiring WebTV Networks for $425 million. Through WebTV, Microsoft hopes that television sets one day take off as Internet access devices, creating a huge new market for the company's products.

"I think Microsoft was pretty astute in this WebTV acquisition," said Galvin. "TVs are in 98 percent of U.S. homes. They want to have Microsoft software embedded in all of the TVs in America."