Analysts are sceptical of a gloomy earngings forecast issued last week by Microsoft. Despite a quarterly 27% earnings rise year-on-year, Microsoft predicted that profit growth would drop to less than 10 percent in fiscal 1998 beginning in July - in part because its most lucrative market, applications software, is "saturated".
Several analysts accused Microsoft of making "typical gloom-and-doom predictions" and "crying wolf," in a telephone conference call. Microsoft's second quarter earnings beat the Wall Street estimate of 51 UScents per share.
Earnings for the quarter that ended December 31, were $741 million, or 57 cents per share, on revenues of $2.68 billion. That compares to $575 million, or 45 cents per share, on revenues of $2.2 billion for the same quarter a year ago, and 47 cents a share in the first quarter of fiscal 1997.
Applications software, the company's largest revenue generator, is expected to grow less than 10 percent, partly because of market saturation, Mike Brown, chief financial officer, said during the briefing. And desktop systems, the second most profitable business, is subject to the contraints of the personal computer market, which is expected to grow only 15 percent, he said.
In addition, the company is investing "huge amounts of money, billions of dollars" in businesses that aren't expected to pull in a profit for some time, he added. "We like challenges," Brown said. "It makes it fun to come to work everyday, but we have to keep worrying too. No worry no fun."
In interviews before the conference call, several analysts said that every quarter Microsoft predicts a future earnings slump, and yet earnings growth hasn't stopped.
"I think they're trying to be responsible and not let analysts and investors get carried away," says Dave Jones, a security analyst for California Technology Stock Letter in Half Moon Bay. An ongoing investigation into alleged anti-competitive practices at Microsoft may also be a factor.
"The only cloud that appears to be hanging over the company is the FTC (Federal Trade Commission)," he says. "Anything that shows them being dominant in the marketplace just invites more scrutiny from Justice Department."
Regardless, the results confirm the fact that company's hold on the market and financial future are assured.
"The juggernaut continues," Jones said. "It's really tough to be in business when you're competing with Microsoft."
"Both Intel and Microsoft seem to be taking the lion's share of revenue growth and the market," says Rob Enderle, an analyst at Giga Information Group Inc. in Santa Clara, California. "This really shows that the market is consolidated around those two companies."
Intel reported on Wednesday that its earnings shot up 45 percent in the latest quarter from a year ago to $1.9 billion.
Meanwhile, Microsoft will initiate a share buyback in the next quarter to pay for an overhang in stock option dilutions, Brown said. The company's stock closed today at $87.125, up $1.12.
Microsoft, based in Redmond, Washington, on the World Wide Web at http://www.microsoft/.