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Tuesday, October 13, 1992 - Page updated at 12:00 AM

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Windows Profits Still Shine Through -- Microsoft Results Exceed Forecast

Microsoft today credited strong sales of its Windows operating system for big increases in first-quarter sales and profits.

The Redmond software maker reported profits of $209 million, or 70 cents per share, up 45 percent over the $144 million, or 50 cents per share reported in the first quarter last year. Revenues totaled $818 million, up 41 percent from $581 million last year.

The numbers came in higher than analysts had been predicting. Most said that the company's fundamentals are strong and that its flagship Windows products for IBM-compatible computers are building dominant market share at the expense of leading competitors.

Early in the year Microsoft warned that its 1993 numbers would not keep up with the 50 percent growth of recent years.

"The company just keeps humming along," said Bill Whitlow, analyst for Pacific Crest Securities in Seattle. "I don't see any shakiness anywhere."

Wall Street apparently agreed. Microsoft's stock price has risen steadily the past two weeks, trading late today at $84.25, up 62.5 cents.

Two of Microsoft's chief competitors, Borland and Lotus, have faced rocky going despite releasing competing Windows products. Borland last week was downgraded by several analysts who expressed disappointment in its just-released Quattro Pro spreadsheet for Windows.

"Quattro Pro was a wonderful product in May of 1991," said David Rothschild, analyst for Piper Jaffray in Minneapolis who had

predicted Microsoft earnings at 71 cents on revenues of $825 million. "Today it looks like Excel 3.0" at a time when Microsoft is selling Excel 4, the next-generation version, he added.

Lotus' spreadsheet for Windows, a derivative of its top-selling 1-2-3 program, has fallen below expectations. An upgrade of the program is rumored to be delayed.

Lotus shares dropped 75 cents in after-hours trading yesterday after the company's chief financial officer blamed sluggish growth on the international recession, slowing PC sales in Japan and shifting of users to Windows.

As early as last spring, Microsoft warned analysts that growth would dip in 1993, partly because of the "law of big numbers" stipulating that 50 percent growth cannot continue indefinitely.

Chief Financial Officer Frank Gaudette said as early as last spring he would be "happy" if growth in 1993 reached half of 1992's rate. Most analysts estimated 1993 growth in the 35 percent range, below today's results.

Most analysts rated Microsoft a "buy" in pre-earnings advisories last week, despite recent reports that the Federal Trade Commission is proceeding with an inquiry and will interview several company officials in coming weeks.

Although it refuses to comment, the agency is believed to be investigating whether Microsoft has engaged in monopolistic practices covered by antitrust law.

"I don't pay much attention to FTC grumblings," Rothschild said. "If you say Microsoft's dominance (of the industry) is due to its market dominance of the operating system, then what about the Macintosh?"

Microsoft accounts for 75 percent to 90 percent of sales of leading applications for Apple Computer's Macintosh - considerably higher than with IBM-compatible computers even though Microsoft's DOS operating system is installed on nearly 100 million of the machines.

Windows, which has sold between 12 million and 16 million units since being upgraded in May 1990, continues to sell at the rate of 1 million copies a month.

"The Windows phenomenon is slower than people realized, and a lot more powerful than people realized," Rothschild said. Piper Jaffray has been testing Microsoft's new Windows database program, the soon-to-be-released Access, "and people here are very impressed with it," he added.

On the eve of its earnings announcement, Microsoft introduced two multimedia programs for personal computers and announced that it will open subsidiaries in Budapest, Moscow, Prague and Warsaw.

One of the first U.S. software companies to "localize," or adapt, its software for foreign markets, "Microsoft believes that the best way to support customers is to provide localized products and local support by local people, who have a close understanding of their areas," said Bernard Vergnes, president of Microsoft Europe.

Microsoft subsidiaries in Moscow, Prague and Warsaw will open by the end of 1992. The company plans to introduce 16 products for the new markets between the end of 1992 and the second quarter of 1993, including Windows version 3.1, Works, Word and Excel.

Microsoft also announced it will release an $80 musical-instruments program in mid-November and Encarta, its long-awaited multimedia encyclopedia retailing for $395 ($249 for students and educators), in mid-December.

Both products require a computer equipped with sound capability, speakers, Windows and a compact-disc drive.

Copyright (c) 1992 Seattle Times Company, All Rights Reserved.

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