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News fuels MS stock surge

Shares of Microsoft leapt nearly 5 percent in midday trading today, after the company's second-quarter earnings exceeded analysts' expectations last Friday.

    Shares of Microsoft (MSFT) leapt nearly 5 percent in midday trading today, after the company's second-quarter earnings exceeded analysts' expectations last Friday.

    In trading today , Microsoft stock rose 91 1/4, up 4.73 percent from 87 1/8. The increase also followed reports that two brokerage firms, Hambrecht and Quist and Piper Jaffray, had raised their fiscal 1997 earnings estimates for Microsoft.

    On Friday, Microsoft posted a 27 percent gain in second-quarter net income from a year ago, beating most Wall Street estimates, but it also issued a strong warning of slower growth starting this summer.

    "I do anticipate slower earnings growth in fiscal 1998 [starting July 1997] due to lower revenue increases in our maturing businesses and margin pressure from continuing aggressive spending on research and development and new business ventures," Microsoft chief financial officer Mike Brown said in a statement.

    But for now, Microsoft is flying relatively high. For the quarter ending December 31, the company announced net income of $741 million (57 cents), up from $575 million (45 cents) in the like period a year ago. Quarterly revenue for Microsoft totaled $2.68 billion, up 22 percent from $2.20 billion a year ago.

    Microsoft's earnings exceeded analyst expectations of 51 cents per share for the quarter, according to FirstCall, a compendium of estimates. Analysts attributed Microsoft's growth to strong sales in its applications and operating systems business.

    "Across the board, their Office applications as well as OEM sales of Windows NT and BackOffice are all up," said Mary McCaffrey, analyst at Alex Brown.

    For Microsoft, the quarter highlighted the continued acceptance of its Windows NT 4.0 operating system. Microsoft executives said quarterly revenue for Windows NT Server was up 240 percent over the like quarter a year ago and that shipments of NT Workstation had tripled. The company also said that holiday sales of devices based on its Windows CE handheld OS were brisk.

    "It's a really strong quarter," said Rob Owens, a research analyst Pacific Crest Securities in Portland. "I think it's going to be strength in NT 4.0. It's cutting into the market share of NetWare. Corporations are adopting 32-bit technology."

    Last week the company shipped Office 97, which Microsoft expects will contribute to substantial growth in the next two quarters. But executives sounded a cautionary note about slowing revenue growth during fiscal 1998 due to saturation of the desktop application and other markets.

    The company also said that it would continue to make substantial investments in Internet technology and interactive media, such as MSNBC and Sidewalk, which are not expected to be profitable for some time.

    "The story here is one of slowing secular growth in fiscal 98, interrupted for a couple of quarters by Office 97," Microsoft's Brown said. "It is not my purpose to second guess the market."

    Such cautionary warnings are not unusual for Microsoft. Historically, the company has attempted to keep financial analysts' expectations about its growth in check so that it can more easily exceed those expectations.

    In a call with analysts last Friday, Brown said Microsoft Network now has 2 million subscribers. He also said the company has $9 billion in cash, a substantial cushion by any standards, and will continue to buy back its own stock. That investment could provide a greater return that simply keeping the cash in the bank, a situation that most healthy companies prefer to avoid.

    Reuters contributed to this report.