Microsoft’s 4th Quarter Plumps Up 89% on Strong Sales
Boosted by surging sales of new software products with fatter profit margins, Microsoft Corp. announced Thursday that its earnings soared 89% in the fourth quarter ended June 30.
For the year, profit climbed a phenomenal 54% to $3.45 billion, while sales increased 31% to $11.36 billion.
“They’ve had a helluva year,” said Scott McAdams, an analyst at Ragen McKenzie, a Seattle-based securities company. “For an $11-billion company to grow 54% is pretty amazing.”
For the quarter, net earnings were $1.06 billion, or 80 cents a share, on $3.18 billion in revenue, compared with $559 million, or 43 cents a share, on $2.26 billion in revenue a year ago.
Particularly strong were sales of Windows NT, an operating system aimed at corporate users, which climbed to $1.8 billion, nearly triple last year’s level. Sales of Office 97, a suite of word-processing and software products, also surged.
But Microsoft is unlikely to continue defying the laws of gravity. With few major software upgrades on the horizon and new markets like the Internet and digital television still years away from profitability, analysts expect to see Microsoft’s revenue and profit growth to slow steadily over the next year.
“Applications account for half of their sales, and that market’s maturing,” said Rick Sherlund, analyst at Goldman, Sachs & Co.
Sherlund predicted that Microsoft’s sales and earnings in the next fiscal year will climb only about 20%.
In character with past pronouncements, Microsoft is encouraging the pessimism.
“Microsoft has enjoyed two incredible years,” said Mike Brown, Microsoft’s retiring chief financial officer. “Next year ain’t going to be like this year was.”
Brown also suggested that Microsoft shares were overpriced. The Redmond, Wash.-based company bought $3.1 billion worth of its own shares under its stock repurchase program last year but has recently held off on purchases because of what Brown called an overheated stock price.
Microsoft shares rose $1.06 to a record $149.50 in regular trading on Nasdaq before earnings were reported. The stock fell to $146 in after-hours trading. Still, the software giant’s share price is up nearly 50% in three months, pushing it past Coca-Cola Co. to make it second only to General Electric Co. in market value.
“The stock gets a premium because they are the biggest kid on the block. You want them to be on your team every time,” said Rob Owens, an analyst at Pacific Crest Securities in Portland, Ore. Owens argued that Microsoft would have to grow by at least 30% a year to justify its current share price, estimated to be about 47 times its 1998 earnings.
Anticipation of Microsoft’s earnings and performance of other computer industry firms has helped fuel a recent rally among tech stocks, which ended Thursday.
While Microsoft earnings growth will slow, the company continues to invest aggressively in new markets, particularly those related to the Internet. The company spent about $2.2 billion in research and development last year, up more than a third. The company expects that figure to rise to about $2.6 billion next year.
Microsoft also plans to expand its work force by 19% this year by hiring 3,600 people.
And under Greg Maffei, Microsoft’s new chief financial officer, the company is expected to be more aggressive in making strategic equity investments. Microsoft has $9 billion in cash even after putting $1 billion into cable company Comcast Corp. It has yet to close a $425-million deal to acquire WebTV Networks Inc. pending regulatory review.
Microsoft is also shifting its strategy in ways that could sacrifice near-term earnings in favor of steadier long-term growth. For example, Microsoft is offering its largest customers the option of paying a subscription fee for access to its products and all upgrades for a three-year period.
But while Microsoft’s growth appears to be slowing, longtime Microsoft observers note that the company has a way of surprising everybody on the upside.
“When you are spending as much as they do on R&D; [research and development], you are going to generate a lot of products,” McAdams said. “We just don’t know what they are going to be.”
Among the most promising growth areas for Microsoft in the coming years, analysts say, are software for digital TVs and other consumer appliances and electronic commerce on the Internet.
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