Microsoft's Stock Climbs on Stronger Revenue Figure

Updated from 4:35 p.m. ET

Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) Thursday met the reduced earnings estimates for its fiscal second quarter, while turning in a higher-than-expected revenue figure.

The company earned 47 cents a share on revenue of $6.59 billion in the quarter ended Dec. 31. Analysts had expected the company would earn 47 cents a share on revenue of $6.51 billion, according to First Call/Thomson Financial. A year earlier, the company earned 47 cents a share on revenue of $6.11 billion.

"This was a record quarter for our Windows business, driven by Windows 2000 Professional, which grew 40% over last year, and Windows 2000 Server, which was up 20% from last year," Chief Financial Officer John Connors said during the company's conference call. Windows 2000 is Microsoft's operating system for large corporations. Customers like "BP Amoco (BP Quote - Cramer on BP - Stock Picks) have rolled out the operating system across thousands of desktops," Connors added.

He also noted that new multiyear contracts signed during the quarter produced a 20% increase in unearned revenue from a year ago, which points to bigger revenue down the road.

Investors were more than pleased with the showing. The stock was trading after-hours on Island at $59.12 after finishing regular trading up $2.69, or 5.1%, at $55.63 a share.

"We're not going to get too euphoric here, but we feel the stock is going to go up over the next few months," said James Ragan, an analyst at Crowell Weedon. (He rates the stock a buy, and his firm hasn't done underwriting for the company.)

But the guidance Connors offered was nothing exciting. For the fiscal third quarter ending March 31, the company expects to earn 42 cents to 43 cents a share on revenue of $6.3 billion to $6.4 billion. Analysts expect the company will earn 44 cents a share on revenue of $6.39 billion, according to First Call. For the fiscal year ending June 30, Connors reaffirmed earlier projections that the company would earn $1.80 to $1.82 on revenue of $25.2 to $25.4 billion. Analysts are looking for $1.81 a share on revenue of $25.21 billion.

The CFO also expressed concern about macro-economic conditions. In a statement accompanying the earnings release, Connors said, "While we are enthusiastic about the break-through products and services the company will be delivering in 2001, we remain guarded about the near-term economic outlook and its impact on PC demand and technology spending." Microsoft said it expects worldwide PC growth of about 10% this year.

Just last month, Microsoft issued a first-in-a-decade warning that brought its estimate for fiscal second-quarter earnings per share down about three cents. Microsoft ascribed the shortfall to a drop in information-technology spending and sagging personal computer sales. Desktop software accounts for roughly 70% of the company's revenue.

And as if that wasn't bad enough, the company struggled through a year of talent flight, nasty court battles and a softening economy.

But Thursday's report "shows that they can move beyond what's tied to the economy and to PCs. They can show success where they've been underrepresented in the enterprise server market," said Tim Gaumer, a TransAmerica fund manager who holds the stock.

Meanwhile, Microsoft's CFO said, "The company will manage its cost structure going forward." But when asked on the conference call whether Microsoft would abandon projects, Connors said, "I wouldn't characterize our approach to improving our profits as spending cuts. I would characterize them as lower rates of growth in spending than you might have seen in years past."