Microsoft Gains After the Close on Better-Than-Expected Earnings

The software giant's higher earnings were driven in part by strong corporate demand and rising PC sales in Asia.
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After verbally coaxing its stock price down to the high 80s,

Microsoft

(MSFT) - Get Report

reported third-quarter earnings today that exceeded Wall Street's expectations. It was the ninth straight quarter that Microsoft has performed better than expected.

The results had their usual effect on the software giant's stock, this time sending it up more than 4 in after-hours trading. The stock had ended regular trading, before the earnings were announced, down 1 9/16 at 86 5/16.

Microsoft said its higher earnings were driven in part by strong corporate demand for its products and rising personal computer sales in Asia.

The Redmond, Wash.-based company said it earned $2.04 billion, or 38 cents a diluted share, excluding a one-time gain of $156 million from the sale of the entertainment city guide

MSN Sidewalk

. Analysts surveyed by

First Call/Thomson Financial

had expected earnings of 34 cents a share.

Including all special items, the company earned $2.19 billion, or 40 cents a diluted share, up 29% from $1.68 billion, or 31 cents a diluted share, in the year-ago quarter.

Microsoft's revenue rose 28% to $5.38 billion from $4.19 billion in the comparable year-ago quarter, when the company introduced Windows 98.

Some analysts were genuinely surprised by the better-than-expected earnings. While beating the Street's estimates has become thoroughly routine and the company easily makes enough money to do so, there were signs this quarter that Microsoft officials wanted to knock down the stock price. Steve Ballmer, Microsoft president, has been telling analysts for a year that the price was too high. But on

Sept. 23, he made the same comment to a group of business writers and editors.

Why?

"The stock price is a hindrance on their recruiting," said John Puricelli, an analyst for

AG Edwards

who expected the company to meet the 34-cent estimate, thus missing the 37-cent whisper number and likely sending the stock price down.

If "Ballmer wants to knock his stock price down, you don't make that whisper number, bad things sometimes happen," said Puricelli, whose firm has not done underwriting for Microsoft. Puricelli has a hold rating on the stock.

Aaron Scott, an analyst for

Advest

, said the company might be able to afford seeing its stock price up again after it dropped to the 80s in response to Ballmer's comments. Advest hasn't done any underwriting for Microsoft. Scott has a buy rating on the stock.

Unearned revenue, the account Microsoft maintains for money it has already made but is not counting in its earnings, fell to $4.1 billion from $4.2 billion last year under accounting rules adopted last quarter.

Investment income rose steeply, jumping to $397 million in the latest quarter from $261 million in the year-earlier quarter. Puricelli said that income should not be included in operating earnings figures. "It should be called nonrecurring," he said. "They're not

Warren Buffett

; they're not

Berkshire Hathaway

(BRK.A) - Get Report

."

In a conference call, the company discouraged analysts from raising earnings estimates but declined to commit to a date for introducing Windows 2000 software.

"Please don't assume an immediate launch spike" on revenue in the next quarter, said Greg Maffei, vice president and chief financial officer. He would not specify whether he thought Windows 2000 was already accounted for in next quarter's estimate.

Scott said Microsoft will not have much trouble selling its currently available software in the meantime.

"NT will continue strong," he said. "That's due to no other products. As long as PCs are selling, they're selling their operating systems."

Company officials and analysts said the popularity of PCs in the home will be crucial to the company's future. Microsoft is trying to position itself -- and therefore the software industry -- as an Internet-based service business.

"It's highly strategic that home PCs continue to grow," Maffei said. Company officials said the Y2K computer bug did not affect its quarterly earnings.

In the conference call, Microsoft executives did not mention the

Justice Department's

pending antitrust lawsuit against the company.