Microsoft Q2 Earnings Soar 74 Percent

Strong growth in PC shipments combined with software purchases made in preparation for expected year 2000 problems helped push Microsoft Corp.'s revenue and income to record levels in the second quarter of fiscal year 1999.

Strong growth in PC shipments combined with software purchases made in preparation for expected year 2000 problems helped push Microsoft Corp.'s revenue and income to record levels in the second quarter of fiscal year 1999.

Net income for the quarter, ended Dec. 31, was US$1.98 billion or 73 cents per diluted share, up 74 percent from 42 cents per share a year ago. The results soundly beat the expectations of 23 brokers polled by First Call Corp., who produced a consensus estimate of 59 cents per share for the quarter.

Revenues totaled $4.94 billion, a 38 percent increase over the $3.59 billion during the year ago quarter.

Sales of Microsoft Office, SQL Server and Exchange all reached new highs for the quarter, with shipments of all server applications nearly doubling in the past year. Sales of Microsoft Exchange Server set a new record, shipping 4.5 million [M] client access licenses in the quarter, Microsoft said.

However, the company remains guarded about prospects for continued growth in 1999. Companies may cut back on desktop and server spending this year, reserving their IT budgets for testing and other expenses related to the year 2000 problem, said Greg Maffei, Microsoft's chief financial officer, in a teleconference conference.

He also warned of an uncertain economic outlook in which troubles affecting Asian markets may spread to other regions. "Business remains tough in China and Korea, business is very tough in Russia, and we saw down performance in Malaysia and Indonesia," Maffei said.

But if Microsoft executives have been losing sleep over the firm's ongoing antitrust trial in Washington and over publicized delays in the release of Windows 2000, they seemed upbeat today about the quarter's performance.

"These are huge results," Jerry Masters, Microsoft's senior director of planning and reporting, said in the conference call.

Sales of software licenses to PC manufacturers soared 48 percent to $1.8 billion, driven by an increase of over 25 percent in worldwide PC sales, especially in the sub-$1,000 category, Maffei said. Increased shipments of Windows NT also boosted OEM license sales, he said.

Overall platform revenues -- comprised mostly of operating systems sales -- grew 50 percent in the quarter, to $2.3 billion. Revenues from software applications and tools grew 27 percent to $2.2 billion, Microsoft said.

Asian markets produced only a slight up-tick in revenues, from $328 million last year to $373 million. PC sales grew slightly in Japan, especially in the retail segment, although revenues overall were more or less flat, Microsoft said.

Stronger growth came from Canada, Brazil, the U.S. and Europe, Maffei said.

Government tax incentives in Sweden designed to encourage PC adoption, and the availability of fairly powerful, affordable PCs on German supermarket shelves helped drive strong growth in Europe.

Looking ahead, revenues in the third quarter could be down as much as $300 million sequentially, thanks to seasonal slowness, economic troubles overseas and the possibility that companies will "lock down" on IT software spending in preparation for 2000, Maffei said.

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