Trial casts doubt on Microsoft stock

Wall Street expects Microsoft to meet or beat earnings estimates when the software giant reports its fiscal 1999 first-quarter results today, but the landmark antitrust trial against the company, which began yesterday, could cast a shadow over its stock price.

As earlier reported, financial analysts expect Microsoft, known for its cautious fiscal predictions, to post profits of 49 cents per share, according to First Call. Estimates from 20 brokers define a range with a high of 51 cents per share and a low of 48 cents per share.

Microsoft is expected to post a gain of about $175 million during the first quarter for its sale of Softimage to digital multimedia tools maker Avid Technology.

The company will report its financial results for the quarter ended September 30 after the market closes today. But analysts said it is too early to guess how the antitrust battle being waged in Washington might affect the company's financial future.

Microsoft reported earnings of 36 cents per share for the like quarter a year ago. For the fourth quarter, the company reported profits of $1.36 billion or 50 cents per share, but at the time chief financial officer Greg Maffei warned that Microsoft's first-quarter revenues likely would be down sequentially due to seasonal factors and the delay of the Windows 98 launch.

Analysts said Microsoft always beats estimates, which has caused some in the financial community to ratchet up their estimates.

"They're caught in a perennial cycle of always having to give cautionary guidance," said Tom Hensel, vice president for research at Everen Securities. "The one time Microsoft misses it will be a big deal, but it can happen."

Analysts said that, because of the way Microsoft is structured and because of the nature of the company's expenses, it is able to post strong profits on only modest revenue growth.

"The real question with Microsoft is how soon will earnings growth track with revenue growth?" AG Edwards technology analyst John Puricelli asked. "I think the answer is sooner rather than later."

Wall Street, confident that Microsoft will at least meet estimates, is looking beyond the current quarter to the software giant's future revenue potential.

Although the company's strong market share in the Office software product market--which includes Word--provides solid revenue,

Top Market Caps (as of 4 p.m. PT)
Company	Valuation (billions)
General Electric	271.3
Microsoft	255.8
Exxon	182.6
Coca-Cola	168.6
Merck	159.3
Source: CNET Investor

there is not much room for growth in that area, analysts said. Instead they will be looking for signs that the company's master plan to move users to its Windows NT platform and to grow Internet and e-commerce revenues is progressing.

Analysts said they will focus on data such as sales figures for Windows NT Workstation and subscription growth and advertising revenue for Microsoft's MSN.com portal site.

"The machine can keep chugging along, but how is the grand plan going?" Hensel asked.

Forming the backdrop to Microsoft's earnings pictures is the commencement yesterday of the antitrust case brought against it by federal and state trustbusters.

"We do not believe that this trial will have a material impact on Microsoft's ongoing earnings potential, but we expect some head-turning news to come out of the events," Mary Meeker, an analyst with Morgan Stanley Dean Witter, wrote in a recent report on the company.

Analysts said they have had a hard time factoring the antitrust case into their fiscal models for the company because no one knows the outcome, or what reparations Microsoft might have to make if it loses the suit.

"Wall Street seems not to have been jarred one way or another by this," Hensel said. "It's unclear even if Microsoft did lose, what they would have to do."

"First they have to lose and then the judge has to say something," Puricelli added.

But analysts were in agreement that investors will react to news of the trial.

"I expect it will have an effect on the stock, but that's not fundamentals, that's just people hearing bad news and saying, 'Oh my gosh, oh my gosh,'" Puricelli said.

Observers expect Microsoft's stock to be most affected early in the trial, when the government presents its view of a monopolistic company illegally using its power to dominate other software markets. The Justice Department (DOJ) and 20 states are suing the company for alleged antitrust violations.

Once the government rests its case, Microsoft will begin its defense, which could help boost shares, analysts said. The trial is expected to last four to eight weeks.