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Strong computer sales boost Microsoft's earnings

The software company reports fiscal first-quarter earnings of 38 cents a share, topping Wall Street estimates of 34 cents.

    Microsoft today posted quarterly results that once again topped analyst expectations, largely because of strong sales of personal computers.

    The company also said it will release a final version of the much-delayed Windows 2000 operating system, formerly called Windows NT, to manufacturers before the end of the year.

    The Redmond, Washington, software giant reported net income of $2.19 billion, excluding one-time gains, or 38 cents per share, for the first quarter of fiscal 2000. This compares with a split-adjusted profit of $1.52 billion, or 28 cents a share, for the same period last year.

    Revenue climbed to $5.38 billion from $4.19 billion a year earlier.

    Microsoft was expected to post earnings of 34 cents per share based on analyst estimates compiled by First Call. Earnings met Wall Street's "whisper" estimates of 38 cents per share.

    Including one-time gains from the sale of Microsoft's Sidewalk properties, earnings reached 40 cents per share.

    The company released its earnings results after the close of regular trading.

    Before the release of the earnings, analysts said they expected Microsoft to continue to benefit from strong worldwide sales of personal computers and a steady increase in sales of its higher-priced Windows NT operating system.

    Sales of the new Office 2000 software suite were seen falling slightly.

    The latest upgrade to the popular office software went on sale June 7 and would typically result in a sizable gain in revenues in its first full quarter of sales. However, many corporate buyers apparently are delaying purchasing Office 2000 until next year as they focus resources on minimizing year 2000 glitches, analysts have said.

    But Microsoft said today that Y2K is not slowing it down much.

    "While we've been warning about a Y2K lockdown [on technology spending], it doesn't appear to have retarded growth," said Microsoft chief financial officer Greg Maffei in a conference call. In fact, Microsoft may even see some minor increases in spending from corporations who have finished Y2K plans ahead of time, he said.

    Maffei noted that the strong PC growth that accounted for the "vast" majority of Microsoft's 27 percent revenue growth will continue into the coming quarter.

    What's in store?
    As for next quarter, the company is expected to launch Windows 2000 at the Comdex trade show in November. Such a move would bolster Microsoft's position with Wall Street and help allay concerns of slower sales resulting from the Y2K technology glitch, analysts believe.

    Microsoft has been heavily criticized for repeated delays that pushed Windows 2000's expected delivery back by more than a year, into the second half of 1999, when many companies plan to freeze computer purchases while they assess the Y2K issues. When revenue from Windows 2000 will show up on Microsoft's books depends on when it starts shipping the software to PC companies.

    Microsoft repeated officially what it had been saying in private for the last month or so--that it will ship Windows 2000 to manufacturers by the end of the year.

    Maffei cautioned analysts not to factor in any significant boost in revenue from sales of the new operating system at all during the fiscal year 2000. The reason for this is that the transition for corporate customers will occur slowly, although Maffei noted that PC manufacturers offering workstations and notebooks for corporate customers will be quick to offer the new product.

    Maffei also addressed questions about the growing interest in Web-based applications and application service providers, or ASPs. ASPs offer smaller customers the option to rent access to software online instead of buying it.

    The market for "rented" software is expected to explode among mid-sized firms, because they can save money and avoid managing complex systems themselves.

    Maffei said there is a potential for Microsoft to have a "major shift in how [Microsoft] takes in revenue--one which could eventually help boost profit margins. "Software as a service is a reality. Clearly we will need to make a transition," he said.

    However, he said it will be two to three years before this trend starts to have an impact on Microsoft's core market of high-end corporate accounts because of the technical limitations of the software rental market.

    Microsoft will experiment with a variety of strategies in this evolving market, he said, which could possibly include everything from simply providing software to ASPs, to hosting applications itself and offering connections to that software for customers, like Intel is doing. (See related story).

    Other clouds are looming over the company. During the quarter, Microsoft lawyers were busy making closing arguments in the antitrust trial brought against the company by the Justice Department. A preliminary judgment from U.S. District Judge Thomas Penfield Jackson could come before the end of the year.

    The company also is embroiled in a lawsuit with Sun Microsystems over Java.

    Reuters contributed to this report.