Analysts Low-Ball Mister Softee by 14 Cents - TheStreet

Analysts Low-Ball Mister Softee by 14 Cents

Strong sales of PCs push profits well beyond analysts' expectations.
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SAN FRANCISCO --

Microsoft

(MSFT) - Get Report

blew away analysts' expectations with a 73 cents per diluted share profit in its second-quarter ended Dec. 31. The consensus estimate from

First Call

was 59 cents per share and Microsoft's year-ago profit was 42 cents a share.

The Redmond, Wash., software giant said its revenues rose to $4.94 billion, or 38%, above the $3.59 billion figure a year ago. Microsoft said in a statement that strong growth of PC shipments during the quarter helped propel its sales higher during the period.

The company said it added 3 million Windows NT workstation licenses in the quarter, but it remained guarded on its 1999 growth outlook because of economic jitters and because companies may spend less on software in general to focus on the Year 2000 problem.

Microsoft shares ended up nearly 4%, or 5 13/16, at 155 5/8.

This story was posted at 8:57 a.m. today.

Just Another Blowout Expected from Microsoft

SAN FRANCISCO -- Another quarter, another blowout. That's what investors have gotten used to with

Microsoft's

(MSFT) - Get Report

earnings, and the most recent quarter looks no different.

Analysts surveyed by

First Call

forecast second-quarter earnings of 59 cents a share, but investors expect the Redmond, Wash.-based software giant to beat that by 2 to 5 cents when it reports after the close today. In its fiscal first quarter, Microsoft exceeded expectations by 7 cents, earning 56 cents per share. In each of the four quarters before that, Microsoft beat the Street's estimates by a penny or two, according to data from

Baseline

.

Greg Maffei, Microsoft's chief financial officer, also said after the first-quarter release that he expected revenue in the December quarter to rise 20% from the year-ago level, with earnings per share from operations up 35%. Based on that, analysts boosted second-quarter estimates to the current 59 cents per share from 52 cents. Now they expect even more.

"Microsoft has done a great job of always doing better than expectations," says Michael Hahn, a

Pilgrim Baxter

fund manager who owns some Microsoft shares in his portfolio. "They know how to set the bar low enough to deliver upside surprises."

Some of the main revenue drivers in the quarter included extremely strong PC shipments and strong

Windows 98

sales, analysts say.

Lower prices have fueled PC shipments, yet Microsoft's royalty payments from software on a per-computer basis are unchanged, notes analyst Neil Herman at

Salomon Smith Barney

, which hasn't performed underwriting for Microsoft. Herman forecasts that original equipment manufacturer revenue, or revenue from PC software royalties, tallied $1.5 billion in the quarter, but he says this estimate could prove low given the strength in PC demand and the move toward Windows NT workstations. He predicts quarterly revenue will rise more than 21% to $4.3 billion and that earnings per share will hit 59 cents.

Morgan Stanley Dean Witter

analyst Mary Meeker wrote in a report that she expects OEM revenue, which happens to be Microsoft's highest-margin business, will rise further this year when Microsoft releases

Windows 2000

(formerly called Windows NT 5.0). Morgan Stanley has performed underwriting for Microsoft.

After Windows 2000 was delayed last year, many analysts pushed back their expectations for the launch date into late 1999 or later. But

Credit Suisse First Boston

analyst Mike Kwatinetz has stuck to his forecast that Windows 2000 will ship this summer "and become the most important Microsoft product since Win 3.0 in 1990. ... Windows 2000 should eventually become the corporate desktop standard." Once that happens, Kwatinetz believes Microsoft's OEM revenue can continue growing at a 25% to 30% clip for at least the next few years. Credit Suisse First Boston hasn't performed underwriting for Microsoft.

For the December quarter, Microsoft is expected to report that the other main source of revenue came from Windows 98 sales, which Microsoft said were particularly strong in Japan and Europe in the September quarter. Salomon's Herman says demand for Windows 98 was robust again in the December quarter, though it came from the U.S.

"In the December quarter, we have been projecting about 2.7 million units sold at retail," he says. "However, our sources indicate that software demand at retail overall has been very strong ... if Microsoft shipped 1 million more units than we estimate, it would add about $50 million in incremental revenue."

Some analysts also expect to see positive signs from Microsoft's Internet business in the December quarter. Meeker notes that "the company's Internet efforts are showing very impressive statistics. The company is now the number three network on the Web (in terms of reach behind

America Online

(AOL)

and

Yahoo!

(YHOO)

.)"

The major risk with Microsoft right now remains the

Justice Department's

case against Microsoft, accusing it of being a monopoly. But fund managers say even that can work to Microsoft's advantage in coming months. Pilgrim Baxter's Hahn says he bought some Microsoft shares last autumn "because as we go through the trial, Microsoft will get to present their side, and that

positive spin could drive the stock higher."

As originally published, this story contained an error. Please see our

Corrections and Clarifications for details.