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July 16, 1998

MICROSOFT Q4 EXCEEDS TOP AND BOTTOM LINE EXPECTATIONS

By CBR Staff Writer

Microsoft Corp has done again what its does so often, reporting fourth quarter numbers that just edge out Wall Street expectations. This time around, Redmond reported net income that jumped 28.4% year-over-year to $1.36bn, or $0.50 per share, when the consensus estimate of analysts surveyed by First Call was for $0.48. Revenue rose 25.8% to $4.0bn, ahead of even the high end of the $3.7bn to $3.9bn range that Wall Street was generally looking for. The big question of the quarter, whether Windows 98 would help, was answered as roughly one million upgrade licenses have been sold to date in the retail channel, providing $150m in revenue before the quarter’s end. Only $100m of that was booked in the quarter, though, in accordance with the company’s conservative policy of an approximately 35% hold-back in revenue recognition for shipments into the retail channel. Key drivers behind the quarter were Windows 95 and 98 and strong organizational licenses of Office 97. Revenue from the OEM channel managed a strong 35% growth rate despite slipping PC sales. For the year, net income rose 30% to $4.49bn on revenue up 27.5% at $14.48bn. Earnings per share rose 26.5% to $1.67 for the year. Results for the year include a $296m charge stemming from the WebTV acquisition. As always, the company warned against over-optimism, pointing to slowing of growth in both revenue and earnings per share in the second half of the year. Chief financial officer Greg Maffei said first-quarter revenue should see a slight decline from the fourth quarter – to the tune of a couple hundred million – but will still see nice growth year- over-year. Cost of revenues will also grow slightly. Earnings are likely to come in about a penny below this quarter. For the fiscal 1999, the company is worried about the continued poor performance in the Japanese market and said that Asia in general will negatively impact 1999 revenues by about 3%. After a glitch in the first quarter, Maffei projects a slight uptick in revenues for the next two quarters and a somewhat wider increase to end the year. Earnings are expected to be roughly flat the first half and will pick up steam with moderate increases in the second half. First Call is expecting $0.47 next time and $2.09 for the full year.

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