Investors look to Microsoft for signs of future growth
By Bloomberg News
January 17, 2001, 11:40 a.m. PT
REDMOND, Wash.--Microsoft is expected to meet reduced fiscal second-quarter profit forecasts Thursday, and
investors are seeking signs that the No. 1 software maker is decreasing its dependence on the desktop PC market.
Microsoft is forecast to report earnings of 47 cents a share on sales of $6.51 billion for the period ended Dec. 31, the average
estimate of analysts polled by First Call. A year earlier, the company reported profit before a charge of 47 cents on revenue of
$6.11 billion.
"I doubt they'll miss because they already preannounced," said Edward Dowd, an analyst with
Independence Investment Associates, which holds shares in Microsoft. "The market expects
them to meet those numbers."
Microsoft is working to introduce new products for consumers and for running corporate
networks to boost growth, as its PC-based programs for word-processing and creating
spreadsheets mature. The company, which gets two-thirds of its sales from PC software,
was hurt in the December quarter as consumers and corporations pared their spending
because of a slowdown in economic growth.
On Dec. 14, the company said sales and profit would lag analyst estimates for its second
quarter and the rest of the fiscal year that ends in June. Before the announcement, Microsoft
had been expected to earn 49 cents a share on sales of $6.8 billion. It was Microsoft's first
warning in more than a decade.
The company said full-year sales will be $25.2 billion to $25.4 billion, about 5 percent below
the previous forecast.
The disappointment capped a rough year for Redmond, Wash.-based Microsoft, whose
shares fell 63 percent in 2000 as sales and profit growth slowed, and a federal judge ordered
the company to be split in two for illegally defending its Windows monopoly. Last year the
stock was the second-worst performer in the 30-member Dow Jones Industrial Average,
after AT&T.
PC Sales Growth
Microsoft's Windows operating system runs 90 percent of the world's PCs, leaving little
room for it to increase sales by taking market share. In addition, PC sales growth is expected
to slow this year from last year's 18.8 percent jump and 1999's 23.3 percent jump, according to research firm IDC.
In February of last year, Microsoft started selling Windows 2000, a new version of its operating system designed to run
corporate computers. It was the company's biggest release of software not targeted specifically at PCs.
While many investors have said they're disappointed with the product's reported sales so far, some said Windows 2000 could be
a bright spot in Microsoft's results for the quarter that just ended, and a sign that the company is succeeding in efforts to
diversify sales beyond the desktop PC market.
Taking on Unix
Microsoft's efforts appear to be paying off, as it looks like Windows has begun stealing market share from Unix, said Patrick
Adams, president of Choice Investment Management, which holds 20,000 Microsoft shares.
IDC last month said it expected Windows 2000 sales to pick up in December and forecast that sales will grow in the coming
year.
Microsoft also is pushing into the consumer market with new products that don't run on PCs. Its PocketPC software for
running handheld electronics devices is gaining market share against Palm, and it's planning to release its Xbox home
video-game system later this year to compete head-on with Sony and Nintendo in a home video-game market that analysts
estimate has annual sales of $20 billion.
More than 600 companies have told investors that their sales or profits for the quarter ended Dec. 31 fell short of forecasts,
according to First Call.
While it's too early to tell whether Microsoft's December forecasts for the fiscal year will be conservative enough to weather the
worst of the economic slowdown, some investors are betting that the company will be among the first to recover.
So far in 2001, Microsoft is the No. 2 gainer in the Dow Jones Industrial Average, after AT&T. "They were one of the first
(technology companies) to lower expectations," Dowd said. "That shows they have a fairly good handle on where the business
goes over the next 12 months."
Some investors may also be betting that Microsoft is poised to beat its reduced forecast. It reported higher-than-expected
profit and sales for the quarter ended March 31, 1989, less than a month after telling investors the results would fall short.
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