Microsoft Reports a Surprising 52% Increase in Income
In the face of its growing legal battle with the Justice Department and declining sales in Asia, Microsoft Corp. proved it still could produce stunning financial results, boosting income by 52% in the last quarter of 1997.
“It was a super quarter,” said Rick Sherlund, analyst at Goldman Sachs, a New York-based brokerage house. With profit of $1.13 billion or 85 cents a share, “they exceeded the Street’s earnings estimates again,” Sherlund said.
Growing problems in Japan and much of the rest of Asia pulled sales in the region down by 8% from the previous quarter.
And Microsoft Chief Financial Officer Greg Maffei warned that problems in Asia would worsen with the company facing a possible “triple whammy” of shrinking sales to computer manufacturers, less revenue from software applications and foreign exchange losses as sales in yen translate into fewer dollars.
Microsoft’s earnings were reported after the close of the market, where shares of the Redmond, Wash.-based company closed down 81 cents at $137.
Microsoft’s 12 key Asian markets have grown at 50% annual rates in recent years and now account for about 13% of total sales, Maffei said. But sales over the next six months could be $300 million below projections, he said.
The rising dollar is also eating into Microsoft’s earnings elsewhere. European revenue would have been $100 million higher in the last quarter if not for the dollar’s rise, the company said.
But with strong sales on a wide range of products, Microsoft still managed to boost overall revenue by an astonishing 34% in the last three months of 1997 to $3.59 billion.
Particularly lucrative to the company has been Office 97, a suite of applications that includes a word processor and spreadsheet. After a slow start because of compatibility problems with an earlier version, sales have been booming. The company says it has sold 20 million copies of the product since it was released early last year.
Increased sales of high-margin operating systems--Windows NT and Windows 95--have also helped boost profits. Sherlund noted that while Microsoft sold 15% more operating systems in the last quarter than the year before, it earned 25% more from those sales than in the previous year.
Microsoft said it faced higher legal costs as a result of its antitrust battle with the Justice Department over the bundling of its operating system with its Internet Explorer Web browser.
Company officials said the legal battle will not affect its plans to release Windows 98--which will integrate the browser Internet Explorer with the operating system--this summer.
“Windows 98 continues to be on the schedule,” said Bob Herbold, Microsoft’s chief operating officer. “We are on track for a great product.”
The company says its share of the browser market continues to climb and is now 40%, up from 33% a few months ago.
Analysts say that even a court decision forcing Microsoft to sell its browser and operating system separately would not materially hurt sales.
“There has been a lot of attention focused on the Department of Justice [case],” said Scott McAdams, analyst at Seattle-based Ragen MacKenzie. “But fundamentally, things look very strong at the company.”
* MORE EARNINGS: D2-3
