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Microsoft Q3 profits up ahead of Street expectations

Massive investment sales comes in handy

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Microsoft yesterday beat Wall Street expectations by two cents a share, thanks to a 23 per cent rise in third quarter profits. Net profits for the quarter reached $2.39 billion, up from $1.91 billion for the same period last year. Those figures translate into earnings of 43 cents a share and 35 cents a share, respectively. Mind you, just under a third of that - $885 million - came from the sale of Microsoft investments, hardly a core activity for a software company. Discount such padding and the company's profit comes to $1.505 billion, or 27 cents a share. Microsoft's investment portfolio stood at $21.3 billion at the end of the quarter - its cash reserves totalled $21.2 billion. Q3 2000 revenues totalled $5.66 billion, and increase of 23 per cent on the $4.6 billion Microsoft recorded for the year-ago quarter. That overall increase is significantly higher than the growth it saw in its OEM OS sales, which rose just 4.8 per cent to $1.67 billion. Standalone sales of Windows grew 14 per cent. Microsoft blames - even now - Y2K concerns and a slowdown in the business PC market, partially due to Intel's notorious Coppermine supply problems. The company doesn't appear to have mentioned the L-word, and while Microsoft's share of the OS market vastly outweighs Linux's share, it can't have failed to have some impact, albeit a small one. Microsoft was, however, pleased with its strength in the application business, highlighting Office as a major contributor to its overall revenue growth. That growth is expected to rise further next quarter, said CFO John Connors, but the earnings per share figure will only see a single-digit rise. According to Reuters, the consensus of Wall Street analysts is for 43 cents a share earnings in Q4, up from the 40 cents a share it recorded for Q4 1999. That quarter should see the impact of Windows 2000, which despite the sale of 1.5 million units, has yet to make much of a difference to Microsoft's bottom line, according to Connors. Wall Street reacted to Microsoft's announcement and Connors' caution by knocking $3.188 off the company's hard-hit share price, taking to $75.75 at close of play. The Street may have positive expectations of Microsoft's earnings for Q4, but it's going to be interesting whether it's a confident in the company when Judge Jackson's anti-trust sentence is announced next month. Earnings expectations may not be badly hit, but we'd be very surprised if the share price isn't in for a further beating. ®

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