Microsoft too trims profit forecasts

Microsoft, which makes the ubiquitous Windows operating system, projected that revenue for its second quarter ending December 31 would come in at $6.4 billion to $6.5 billion, while earnings per share would be 46 cents or 47 cents, below the Wall Street consensus estimate of 49 cents per share.

Microsoft projected earnings of $1.80 to $1.82 per share for the full fiscal year, below the average Wall Street forecast of $1.91 as compiled by First Call/Thomson Financial.

"We are seeing slowing global economic conditions, particularly in the US. Like many others in the industry, we are seeing accelerated slowing in PC sales as the quarter progresses," Microsoft chief financial officer John Connors told a conference call.

"We are seeing some softness in the general level of spending in corporate IT (information technology) accounts, which is impacting our desktop software sales, and we are seeing an industry-wide slowdown in online advertising sales and subscription revenue growth, which is impacting our consumer segment," Connors said.

Microsoft also cut its revenue forecast for the full fiscal year to between $25.2 billion to $25.4 billion, about 5 per cent lower than its previous estimate.

Investors may `freak out’

The announcement, made after the close of US markets, knocked Microsoft shares down to $52-1/4 in after-hours trading, their lowest level in a week. That followed a drop of $1-3/4, or 3 per cent, to $55-1/2 in regular Nasdaq trading.

Microsoft shares are down 8 per cent this quarter and have tumbled from a year-high of $119-15/16 set last December. "This has the potential to freak out investors," said WitSoundView analyst Arnie Berman, saying the outright earnings warning cut to the core of Microsoft’s strong record of financial predictability. "It is certainly a watershed event."

Although the Redmond, Wash-based company has guided revenue forecasts lower in the past, it has never warned that it will miss earnings forecasts, he said.

"Microsoft is the only tech company over 10 years old that I can identify that has never warned," Berman said. "This company has not missed a quarter since they were incorporated."

Others said it could have been worse.

Despite the lowered forecasts, Microsoft would still post about a 6 per cent rise in quarterly profits from the year-ago period, said Scott McAdams, president of Seattle-based brokerage McAdams Wright Ragen.

"I’d say given the environment that it’s probably an achievement, but it’s clearly disappointing. But given all the profit warnings this quarter it’s not entirely unexpected," McAdams said

Office slowing but windows fine

Berman said while it was surprising that Microsoft had cited slower corporate IT spending, warnings during the past two weeks from three corporate PC suppliers — PC Connection Inc., CDW Computer Centers Inc. and Insight Enterprises — had fired off warning flares of slowing business demand.

But the bulk of Microsoft’s slowdown was in desktop applications, a segment dominated by the popular Office suite of business software, Connors said.

Several analysts quizzed Connors on why sales of Office and other software normally bought by businesses would be flagging amid a slowdown in consumer PCs. Connors said many machines tagged as "consumer PCs" actually were bought by small or medium-sized businesses.

Sales of Windows 2000, Microsoft’s flagship operating system for businesses, and its line of server products like the SQL database software, appeared to be healthy, Connors said.

McAdams added that the higher price tag on Windows 2000 hadhelped keep results from Microsoft’s operating system segment from sinking too far.

Microsoft has also often used gains on its vast portfolioof investments to boost results, but Connors said he expected such gains to be in line with previous forecasts of about $800 million for the quarter.

That may signal that those holdings are coming underpressure, too, McAdams said.

"Those portfolios are under pressure right now because ofthe devaluation of the market," McAdams said, pointing to Microsoft’s holdings in slumping companies like AT&T and European cable company UPC.

"Even if there are gains, they don’T want to be realizingthem now, I mean, nobody wants to be selling now," McAdams said.

Looking ahead, Connors said Microsoft was bullish about itsbusiness in the second half of calendar 2001, noting that the next-generation of Windows, code-named Whistler, and the newest version of Office would be launched then.

"These are each very compelling products that will showcasethe excitement of the personal computer. It’s up to us to do a great job bringing these two break-through products to market with a great deal of enthusiasm," Connors said.