Microsoft says Windows 2000 sales boosted earnings

Microsoft Thursday said that a surge in demand for Windows 2000 helped it meet lowered earnings expectations and post a modest gain in fiscal second quarter revenue growth.

In December, Microsoft issued a rare profit warning that led analysts to cut forecasts to 47 cents a share. Microsoft met those lowered expectations Thursday and posted revenue of $6.59 billion, an 8% increase over the $6.11 billion it earned in the same quarter a year ago. Net income was $2.62 billion compared to $2.43 billion in the same quarter last year.

Even with the positive earnings, Microsoft officials said they remain cautious about the economy's impact on PC demand and technology spending.

Microsoft said the second quarter earnings were built on demand for Window 2000 Professional, Window 2000 Server, and the .Net enterprise servers, namely SQL Server 2000 and Exchange 2000. But the company did see a decline in revenue for its desktop applications, including its cash cow Office.

"It was a record quarter for the Windows business driven by strong demand for Windows 2000 Professional and Windows 2000 Server," Microsoft Chief Financial Officer John Connors said. Connors said sales of Windows 2000 Professional showed 40% growth, while sales of Windows 2000 Server grew by 20%.

Analysts expect Windows 2000 server, which was released nearly a year ago, to hit its stride this year as many enterprise customers move from the pilot stage to deployments.

Indeed, Connors said part of the server revenue growth was driven by higher than expected demand for Windows 2000 Advance Server, the enterprise edition of the software. But he said Windows 2000 DataCenter sales were so small they did not influence revenue results. DataCenter is the high-end Windows 2000 targeted at mission-critical applications. It was released on Sept. 26, 2000.

Revenue in the company's enterprise software and services segment, which includes enterprise servers and server applications, was up 21% to $1.24 billion.

Microsoft reported $2.06 billion growth in desktop platforms in the second quarter, a 13% growth over the second quarter last year. Desktop platforms include Windows 2000 Professional, Windows NT Workstation, Windows Millennium Edition and Windows 98.

While the desktop platforms showed an increase, Microsoft's desktop application revenue took it on the chin. Revenue was $2.49 billion, down 2% from $2.53 billion in the prior year. The results are significant because the desktop applications revenue includes Microsoft Office, which accounts for nearly 50% of Microsoft's revenue.

Microsoft also reported cash reserves of $26.89 billion. The company announced it expects revenue to be $6.3 to $6.4 billion for the third fiscal quarter, which ends March 31. Earnings are expected to be from 42 or 43 cents.

The company projects yearly earnings to be in the range of $25.2 billion to $25.4 billion. The fiscal year ends June 30.

Contact Senior Editor John Fontana

Other recent articles by Fontana