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Tuesday, April 20, 1999 Published at 20:48 GMT 21:48 UK

Business: The Company File

Microsoft beats earnings expectations

Bill has yet another earnings surprise

Software giant Microsoft has once again outpaced market analysts, delivering higher-than-expected earnings in its third quarter.

The company announced earnings of 35 cents a share - up 43% from the same period a year earlier, when the company paid out 25 cents a share.

On average, analysts had forecast Microsoft to report earnings of 32 cents a share. However, many observers had already expected the company to beat this estimate by at least 2 or 3 cents a share - and they were proved right.

Revenues were $4.33bn - better than the $4.2bn forecast by analysts, and up 15% on the $3.77bn earned during the same quarter last year.

Microsoft appears to make a habit out of beating the forecasts. Three months ago the company completely surprised the markets when it announced a dramatic 75% surge in second quarter revenues.

This time round the earnings surprise was less dramatic and as a result Microsoft's share price slipped slightly in after-hours trading - down 3/8 to 82-3/4.

Strong 'Office' sales

Microsoft's gains were powered by strong sales of its core Windows operating systems and Office applications.

Greg Maffei, the Chief Financial Officer of Microsoft, said in a statement that the company had put in a "solid performance across all product lines". He remained guarded, though, about growth over the rest of this year because of corporate spending focusing on the Year 2000 bug.

The first signs of economic recovery in Asia are already feeding through into Microsoft's pockets. Sales in the region were up 22% on the year, a result Mr Maffei called "much-improved".

Black clouds on the horizon

Microsoft shares are up more than 150% this year, but there is one big worry for investors - the government's long-running antitrust trial against the company.

Earlier this month Microsoft's shares surged because of rumours the suit might be settled out of court. However, despite several meetings between company lawyers and the government, the trial is expected to resume next month after a two-months recess.

Steve Shepich of Olde Discount Corp warned that while Microsoft's business model was "very solid" the outcome of the trial would be the "real uncertainty".

But ultimately the company's success will depend on the health of the computer industry world wide.

The world's number one PC maker, Compaq, recently gave a drastic profit warning. It will announce its result on Wednesday, at the same time as IBM, whose personal computer division lost $1bn last year.

Analysts said that Microsoft is somewhat insulated from computer sales trends because of its diverse line of products and a gradual market shift to its more expensive Windows NT operating system.

The decision not to include unearned revenue of $400m related to the Microsoft Office 2000 technology guarantee and to shift it to coming quarters will help to smoothen out any future slowdown in earnings growth.

Nonetheless, new computer sales are the main source of income for Microsoft sales of its operating systems, so any downturn in the industry is bound to hurt the software giant from Seattle.

"There is no doubt that if there is a serious PC slowdown, no one selling PC software is going to be immune," said Bill Epifanio of J.P. Morgan.

"You have to look for what Microsoft has to get it through a slowdown."

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