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
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
"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
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
"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
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.