By John Rogers

Microsoft Corp did what it does best Tuesday, reporting quarterly earnings that beat Wall Street expectations by a few cents despite a sizable chunk of revenue that had to be deferred until next quarter. This time around, the Redmond, Washington-based software giant posted third-quarter net income up 43.4% at $1.92bn on revenue up 14.8% at $4.33bn. Earnings per share came in at $0.35, beating the First Call consensus of $0.32.

The quarter’s performance left no doubt that Microsoft remains largely unscathed by the incredible pressure in the market for PCs, as platform revenues rose 28% to $2.05bn in the quarter. OEM revenues rose 29% to $1.6bn on the back of higher PC shipments as customers snap up low-priced machines.

Windows NT workstation was one of the stars of the quarter, rising to account for 25% of all desktop operating systems revenue. The company claims that 30 million licenses for the OS have now been sold, compared to 35 million copies of Windows 98. In other business segments, applications and tools revenue rose to $1.94bn from $1.87bn and interactive media and hardware revenue rose to $341m from $280m a year ago

The quarter was hit by $400m in deferred revenue from sales of Office 97, due to the fact that – as the company had previously warned – free Office 2000 upgrades were given with the suites sold during the quarter. Thus, revenue won’t be accounted for the sales until the coupons are redeemed and $300m of that total is expected to be booked next quarter. The $400m shortfall, which would have amounted to roughly $0.04 per share on the bottom line, was essentially offset by $350m in investment income that was realized during the quarter.

The unusually high total recognized in that area – investment income was up nearly 280% year-over-year – as well the fact that it nicely offsets the coupon accounting issue illustrates Microsoft’s resources and strength in managing earnings with regard to expectations. Chief financial officer Greg Maffei admitted on a conference call with analysts that investment gains won’t typically be that high going forward.

For the nine-month period, net income rose 78.2% to $5.58bn on revenue up 26% at $13.22bn. Earnings per share for the nine month rose 72.9% to $1.02. The surge was partly due to the fact that the year-ago period saw a $296m acquisition charge, while the corresponding period this year includes a one-time gain of $160m.

Looking ahead, Maffei gave the customary warning that Microsoft remained guarded about growth for the remainder of the calendar year, given the likelihood that organizations will lock down their systems infrastructures due to year-2000 concerns. He said revenue for the fourth quarter will see a roughly $500m increase sequentially – which amounts to low- to mid-20s percentage growth on a year-over-year basis. Earnings per share for the quarter are expected to come it about 40% up over the prior year’s $0.50.

Beyond that, the first quarter of fiscal 2000 should show revenue flat with the fourth quarter, with EPS down a few pennies from the prior quarter. The second quarter should see another $500m sequential rise in revenue and EPS should also rise about $0.05 quarter-over-quarter.