Microsoft Beats Estimates, Reports 43% Profit Gain
SEATTLE — In sharp contrast with the gloomy reports from personal computer makers in recent weeks, PC software giant Microsoft reported a 43% surge in earnings for the quarter ended March 31, lifted by strong sales of its Windows operating system.
Microsoft’s profit for the quarter climbed to $1.92 billion, or 35 cents a share, from $1.34 billion, or 25 cents a share, the year before on revenue that increased 15% to $4.33 billion. Analysts had estimated Microsoft would earn 32 cents a share, according to First Call.
The company credited the increase to strong sales of its Windows 98 product for consumers and solid growth in products for corporate users, including Windows NT and SQL Server database software.
“With a lot of PC companies at a break-even point, Microsoft may be about the only one making any profit at all on PCs,” said Rob Enderle, analyst at Cambridge, Mass.-based researcher Giga Information Systems.
The earnings report didn’t reflect $400 million in revenue that Microsoft set aside in reserve to account for coupons it has distributed that allow buyers of its Office 97 software to upgrade to Office 2000 when it is released in June; that revenue and profit will be booked when the upgrade coupons come in.
But the profit numbers were boosted by $720 million in income from investments, including the sale of $350 million worth of bonds and equities.
Adding to growing evidence of a recovery in Asian markets, Microsoft said its sales in Asia grew 22% for the quarter from the year before to $475 million.
But Microsoft’s most notable growth came from a 29% increase in sales, to $1.6 billion, to so-called OEMs, personal computer companies that sell products bundled with Microsoft software.
“While there were jitters, the PC industry is fundamentally healthy and the underlying demand is good,” said Microsoft Chief Operating Officer Greg Maffei.
While the overall industry may be healthy, not everyone in it is. Compaq Computer announced last week that its first-quarter earnings would be $250 million, half of Wall Street’s expectations, while IBM admitted it lost close to $1 billion on its PC business last year.
Both companies blamed a sharp drop in PC prices. Worldwide PC market revenues fell slightly to $147 billion last year in spite of a 16% increase in units, to 93 million, according to San Jose-based market researcher Dataquest. The price of the average computer has dropped to about $1,200 from $2,100 two years ago, according to analysts.
Critics said Microsoft has used its monopoly power to hold its software prices artificially high even as hardware prices have come down. Mark Cooper, director of research at the Consumer Federation of America, a Washington-based consumer advocacy group, points out that the price of Windows installed on a personal computer has climbed from a low of $19 in 1990, when Microsoft effectively shut down its last major competitor on the desktop, to a current price of about $50.
Microsoft says consumers are getting much more for their money in the form of new software functions.
Falling PC prices may benefit Microsoft by helping the company reach new users before a new generation of devices such as cell phones and hand-held computers begin to show up as alternatives to the PC.
“As more people buy cheap devices that use Windows, it’s harder to teach them to use something else,” said John Parkinson, the Chicago-based chief technologist at Ernst and Young. “You get a convenience lock-in.”
Intel, the other major player supporting the “Wintel” standard, announced last week that its first-quarter earnings climbed 57%, another sign that the personal computer is maintaining its position at the core of the information revolution in spite of the troubles of many PC makers.
Microsoft’s earnings announcement showed no impact from the landmark antitrust trial now in recess. The Justice Department and 19 states have accused Microsoft of using its monopoly power in Windows to build its Internet browser’s market share.
* MORE EARNINGS: C2, C3
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Asian Rebound
Asian Reboundsales to customers in Asia jumped 22% in the quarter ended March 31, while European sales grew 4% and sales in the Americas rose 6%. Sales to original equipment manufacturers (OEM) were up 29%. First-quarter sales by sector, in millions:
OEM
1998: $1,233
1999: $1,593
*
Americas
1998: $1,256
1999: $1,331
*
Europe
1998: $897
1999: $932
*
Asia
1998: $388
1999: $475
Source: Microsoft Corp.
