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News > Technology
Microsoft stock soars 18%
October 19, 2000: 4:30 p.m. ET

Strong earnings news send Microsoft shares sharply higher
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NEW YORK (CNNfn) - Shares of software giant Microsoft Corp. soared almost 18 percent in midday trading Thursday after the company reported better-than-expected fiscal first-quarter results, driven by stronger-than-expected revenue, cost controls, and a big jump in investment income.

Around noon ET, Microsoft was up $9.13, or 17.6 percent, to $60.88. The company's stock had reached a two-year low of $50.37 earlier this week, as slowing revenue growth and a major antitrust case against the company cast a black cloud over its shares.  

After Wednesday's close, Microsoft (MSFT: Research, Estimates) reported that its first-quarter net income, before an accounting change, rose 18 percent to $2.58 billion, or 46 cents per share, from $2.19 billion, or 40 cents per share, in the same quarter last year. That was 12 percent above the mean of analysts' estimates of 41 cents, according to earnings tracker First Call.

graphic   VIDEO  
graphicJohn Connors, CFO of Microsoft, chats with CNNfn about strong earnings.
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Almost all of that gain came from Microsoft's investment portfolio. During the quarter, the company collected $1.13 billion from interest on its cash balances and gains on the sale of securities. That's up from $550 million in the same period last year. The software giant ended the quarter with $24.7 billion in cash and short-term investments. In fact, Microsoft's operating income was flat with the same period last year. Operating income as a percentage of revenue declined to 47.9 percent from 51.8 percent.

Revenue rose 8 percent to $5.8 billion from $5.38 billion, aided by sales of the company's Windows 2000 operating system and a 31 percent gain in consumer software, services and devices sales. The quarter's revenue total was $100 million above the estimate of Merrill Lynch analyst Chris Shilakes.

While the increase in Microsoft's net income came from investment gains, rather than operations, securities analysts still found reasons for optimism within the company's results, and several of them increased their fiscal 2001 earnings estimates Thursday morning. As an example, Goldman Sachs raised its 2001 earnings estimate for Microsoft to $1.91 a share from $1.88.

Antitrust case out of the limelight

Microsoft's operations were aided by stronger-than-expected sales of its new Windows 2000 operating system for corporate use and its Windows Me operating system for consumers. They were hurt, however, by a weak euro, which caused revenue from the Europe-Middle East-Africa region to decline by 8 percent.

"With the Department of Justice process out of the limelight now, investor attention has been squarely focused on Microsoft's business fundamentals over the past several months," said CIBC Oppenheimer analyst Melissa Eisenstat in a research note. "During that time there has been a significant degree of doubt about Microsoft's long-term prospects and, more pointedly, about the success of Windows 2000 and the Internet. We think this quarter's results go at least part of the way to alleviating these concerns." 

In an interview with CNNfn Thursday morning, Microsoft's chief financial officer John Connors said that economic conditions and the outlook for PC sales "don't look as rosy as they did four months ago" because of the weak euro, declining stock markets in the United States, and soaring oil prices. "We're guarded about the second half, but the December quarter looks very good," Connors said. [100KB WAV, 100KB AIF]

Lehman Brothers analyst Michael Stanek said he believes that "the worst is now over" for Microsoft, and he is "pounding the table" on the stock. Stanek increased his fiscal 2001 revenue estimate to $26.54 billion from $26.29 billion, and his earnings-per-share estimate to $1.91 from $1.88

"We believe NT Workstation and Windows 2000 Professional will enjoy 30 percent growth in fiscal 2001," Stanek said in a research note. "Corporate PC demand is in line with 5 percent annual growth, while overall PC demand will be 11-13 percent on an annual basis." 

Gap in growth rates

While Microsoft's revenue growth rate was stronger than expected, it's still a far cry from software industry stars, such as Oracle (ORCL: Research, Estimates), Siebel (SEBL: Research, Estimates), or i2 Technologies (ITWO: Research, Estimates). 

Last June, Oracle said that its fiscal fourth-quarter net income increased 76 percent to $926 million, while revenue grew 17 percent to $3.4 billion. Likewise, Siebel reported that its second-quarter net income rose 126 percent to $54.8 million, while its revenue jumped 119 percent to $387.4 million.

Oracle and Siebel have achieved their rapid growth rates by focusing on software that automates business procedures, such as marketing, sales, financial management, inventory, and logistics. In addition, the exploding growth of the Internet has created a healthy and continuing demand for Oracle's database products.

Microsoft, by contrast, is still tied to both corporate and consumer desktop software. Its growth has become highly correlated with that of the underlying personal computer market. The company is betting on its new .NET platform to accelerate its revenue growth and expand its influence beyond the desktop.

Microsoft says that the fundamental idea behind .NET is that the focus is shifting from individual Web sites or devices connected to the Internet to constellations of computers, devices and services that work together to deliver broader, richer content. Through .NET software, the company aims to enable people to collaborate and share data to a greater degree than is now possible on the Web. graphic





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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.