Microsoft Shows Why It's Still Tech Heavyweight Champ

Illustrating once again why it is one of Wall Street's all-time go-to names, software giant Microsoft(MSFT) said Wednesday it will beat previous revenue projections despite the ailing economy.

The company announced after the closing bell Wednesday that it would post fiscal fourth-quarter revenue of $6.5 billion to $6.6 billion, up from previous guidance of $6.3 billion to $6.5 billion. Wall Street analysts were expecting the company to show revenue of $6.46 billion, according to Thomson Financial/First Call.

But the company also said it planned to post a $2.6 billion net investment loss due to writing down weakened investments in the beleaguered cable and telecom areas. In May 1999, Microsoft pumped $5 billion into AT&T(T), an investment that has since cratered along with the floundering communications company's stock, which is off 56% since that time. With that charge, Microsoft said its actual earnings would be only a penny per share.

However, excluding the loss -- which is how analysts will calculate their earnings models -- the company said its results for the fiscal fourth quarter ended June 30 would be "in line with previous guidance."

In April, Microsoft said June quarter earnings would be 41 to 42 cents per share, not the 43 cents analysts were expecting. Currently, the consensus outlook stands at 42 cents.

But Wall Street wouldn't have any of the negative Wednesday evening as its old faithful managed to deliver during the most trying of economic times. Investors were bidding up the stock in after-hours trading, sending shares up 5.9% to $70.41 on Instinet. In regular trading Wednesday, it closed at $66.50, up $2.02 or 3.1%.

"They're ahead on the revenue side, and that's a huge plus, especially when lots of companies are only coming through with negative news on revenues and earnings, or even losses," says Aaron Scott, an analyst with Tucker Anthony Sutro who rates Microsoft buy. (His firm hasn't done underwriting for Microsoft.)

Microsoft said the big investment loss is due to a $3.9 billion pretax charge to write down private and publicly traded investments, many in the cable and telecom industries. "Generally accepted accounting principles require that we recognize this charge at this time, but we remain steadfast in our commitment to the strategic business relationships that our long-term investments continue to support," said John Connors, chief financial officer.

Scott said Microsoft likely managed to squeeze an extra $100 million into its revenue line by selling more of its productivity products, such as its recently released Office XP suite of workplace programs. But the company also may have benefited from the comparably lower cost of products such as the Exchange server email product and its SQL server database offering. Both products showed surprisingly healthy growth during the company's fiscal third quarter, as well.

"The SQL server product is a much lower price point than an Oracle(ORCL)product, so with some of the technology spending cutbacks, SQL could look more favorable to some purchasers," says Scott.

As for the company's big write-down, Scott doesn't believe it will cause much hand-wringing on Wall Street. After all, at the end of March the company had $30 billion in cash and $17 billion in equity investments. The company's big charge likely will be felt in that $17 billion worth of equity investments.

"This is a stable company that's got a long history of earnings, a huge cash hoard, and gross margins of more than 80%," Scott says. "It's a quality company that has investors flocking to it in tough times."

The company is set to post official results July 19.

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