Microsoft Earnings Hit New Records -- Keep It Quiet Though

Microsoft last night reported record results for its second quarter, but the announcement was more subdued than for any previous quarter. Even 11 hours after the announcement, there was no press release via PRNewswire, as usually happens, and no available recording of the financial analysts conference call with CFO Greg Maffei.

Only the investor relations part of the Microsoft website had the results, and it was not billed as one of the top stories.

Perhaps profits of $1.98 billion on income of $4.94 billion for the second financial quarter were just a bit too much to be cool at this particular moment. That's an increase of 38 per cent on revenue and a monstrous 75 percent increase in profits over the same quarter last year. Microsoft denies it is a monopoly, as Richard Schmalensee, its economics witness, is currently testifying in Judge Jackson's court.

In keeping with Microsoft's desire to keep a low profile, we thought we would report to readers some of the lowlights that so easily manage to get omitted from the financial press and elsewhere.

Whenever Microsoft claims great growth for a product or service, without any supporting hard data on numbers shipped (and we don't mean percentage increases), it usually means that the result was poor. Exchange was credited with 4.5 million client licenses, but OEMs love Exchange because users need so many servers to cope with the clients. It's strange that there were no figures for Exchange Server though.

SQL Server 7.0, the former Sybase product that Microsoft has tarted up and renamed rather naughtily to lean on the venerable SQL name is growing at "nearly three times Oracle's CY98 growth rate. So the secret is out: SQL Server cannot be doing well, because there's no hard data here, and relative growth rates disguise the truth: only sales dollars really count.

NT Workstation sales were 3 million in the quarter, which is not very many considering the reliability of Windows 98. Microsoft claims "more than 25 million units of NT Workstation have now been licensed. NT Server sales however were just "strong", and we know what that means, although they outshipped all other server operating systems. But there again, Microsoft ignores Linux, which Schmalensee was saying had more than 4 million server sites, at least until a few days ago when the story was suddenly changed.

Regionally, the Americas revenue was up 34 per cent, EMEA up 37 per cent, Asia up 14 per cent, and OEM up 48 per cent on the year-ago quarter. OEM sales are proving to be the powerhouse of growth (reaching $1.796 billion in the quarter), but making Microsoft more vulnerable to any downturn in PC shipments, which means the present quarter. Productwise Microsoft gives little information: platforms (which includes WebTV) were up 50 percent; applications and tools up 27 per cent, and interactive media and other up 36 per cent.

For American taxpayers, the good news was that Microsoft is having to pay more than a billion dollars in taxes for the quarter. Microsoft has in its money box $19.237 billion, and its income from investments was a derisory $337 billion for the quarter. This money is not serving shareholders well - but what could Microsoft buy with it? Not British Telecom, anyway.

Microsoft did buy 2.7 million of its own shares over the quarter.

As ever, Maffei was pessimistic about Q3 and expects a decline of $300 million in revenue sequentially. Carla Lewis of Microsoft investor relations said "That would be normal . . . seasonal behaviour coming off a holiday high". What kind of high could she mean? Let's finish on an upbeat note: assuming these unaudited figures are correct and that somebody has counted the cash and checked those funny little accounting practices to defer revenue, it was a crackingly good quarter at the wrong moment. We didn't see any mention of the risks associated with the outcome of the trial, but no doubt that was an oversight, and there will be a one-liner in the 10-Q to be filed with the SEC.

Wall Street loved it and marked MSFT up. It had reached $161.375 on Reuter's Instinet, although the close was $155.625, up 3.9 per cent on the day. The financial analysts all got their predictions horribly wrong, with their consensus for earnings of 59 cents/share being somewhat below the 73 cents result (they were only 24 per cent wrong). They don't mind, however, because most have big handfuls of Microsoft stock. Perhaps Judge Jackson will mind however: if he had Microsoft stock he would have had to disqualify himself from the case. ®

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