MSFT ( $52--> ? ) Posts Sharply Lower 4Q Earnings
By Rebecca Buckman
Staff Reporter of The Wall Street Journal
Microsoft Corp. warned that profit and revenue would likely dip below Wall
Street estimates in its current quarter, as demand for personal computers
continues to slacken.
The projection accompanied the Redmond, Wash., software company's fiscal
fourth-quarter results, which included sharply lower net income of $66
million, or a penny a share, because of a massive -- albeit previously
disclosed -- $3.92 billion write-down to cover drops in the value of stocks
in its investment portfolio. Microsoft booked an investment loss of $2.62
billion, since it also realized some other investment gains.
In its core operations, however, Microsoft reported healthy results,
demonstrating again its ability to eke out respectable growth despite
sluggish, industrywide PC sales. Sales of higher-priced versions of
Microsoft's core Windows software, as well as strong growth in sales of
consumer services and powerful "server" software, helped overall revenue
surge 13% for the quarter ended June 30, to $6.58 billion from $5.8 billion.
The figure was in line with an upbeat projection Microsoft issued last week.
The company said then it expected revenue of $6.5 billion to $6.6 billion,
up from previous estimates of $6.3 billion to $6.5 billion. Without the big
investment write-down, income for the fourth quarter was $2.75 billion, or
about 43 cents a share, Microsoft Chief Financial Officer John Connors said.
In the year-ago quarter, net income was $2.41 billion, or 44 cents a share.
"When you look at the details of the June quarter, they looked very good,"
said Goldman Sachs analyst Rick Sherlund, who also noted that Microsoft gave
a solid profit outlook for its current fiscal year. Microsoft slightly
boosted revenue estimates for the year and said it expects earnings between
$1.91 and $1.95 a share, in line with the current Wall Street consensus of
$1.94.
But in the short term, before Microsoft releases its new Windows XP
operating system in October, the company worries sales will slow. That will
undoubtedly trouble investors, who may "feel a little whiplashed" after
listening to Microsoft's upbeat revenue prediction last week and, now, a
gloomy forecast for the current quarter, Mr. Sherlund said.
Mr. Connors said yesterday he anticipates revenue of $6 billion to $6.2
billion for Microsoft's current, fiscal first quarter, and earnings of
between 39 cents and 40 cents. That per-share range is below the current
consensus estimate of 45 cents a share, according to Thomson Financial/First
Call. Still, Microsoft has a history of being conservative with forecasts.
Microsoft can "offset the PC industry's woes temporarily, [but] it can't do
so completely or for long," said Drew Brosseau, an analyst with SG Cowen in
Boston. He added that much of Microsoft's projected revenue growth for this
fiscal year will come from lower-margin businesses, such as its forthcoming
Xbox video-game console. Microsoft's income from operations will likely
remain roughly flat this fiscal year.
Microsoft shares, which were up $2 to $72.57 as of 4 p.m. Nasdaq Stock
Market trading, gave up that gain after the release of the earnings news.
Shares fell to $69.20 in after-hours trading.
For Microsoft, uncertainty about future PC demand underscores the importance
of selling new products, such as Windows XP, that could spark sales of new
computers. The uncertainty has also prompted analysts to wonder how long
Microsoft can use its pricing power -- fueled by a market stranglehold on
desktop software -- to insulate its business from wider PC-industry trends,
as it did in its just-ended quarter.
Indeed, sales of the more-expensive Windows 2000 operating system -- for
which Microsoft gets about $30 more per copy from computer makers than the
older Windows 98 -- helped revenue from "desktop platform" software surge
16% in the just-ended period. Mr. Connors declined to comment on how much
Microsoft will charge for Windows XP, though the possibility that the
company will charge more for the product has been a hot topic of
speculation.
Microsoft's recent, strong financial performance "does raise the point that
Microsoft . . . can do whatever it wants with pricing," Mr. Brosseau said.
Revenue in the fourth period rose about 2% from the previous quarter ended
in March, a better growth rate than most estimates for world-wide PC sales.
Microsoft is also lessening its dependence on new PC sales by pulling in
revenue from sales of software "upgrades," such as its new Office XP
product. The company is also gleaning revenue by aggressively going after
Windows and Office sales that are lost when customers circumvent Microsoft's
licensing rules, said David Readerman, an analyst at Thomas Weisel Partners
in San Francisco. Microsoft's Mr. Connors said the company has "always had
an antipiracy effort" that seeks to enforce Windows licenses.
Finally, Microsoft is expanding its revenue base with products that don't
have to be used with PCs at all. The company's powerful "server" software,
which competes against products from companies such as Sun Microsystems Inc.
and International Business Machines Corp., continues to gain traction: In
the recent quarter, revenue from "enterprise software and services" sold to
big businesses surged 20%. Revenue from consumer services and devices shot
up 22% despite a slowdown in online advertising.
For its fiscal year, Microsoft earned $7.35 billion, or $1.32 a share,
compared with $9.42 billion, or $1.70 a share, last year. Revenue for the
fiscal year was $25.3 billion, up 10% from the $23 billion figure recorded
last year.
Separately, in the antitrust case against the company, a federal appeals
court gave the government until Aug. 3 to respond to a filing Wednesday by
Microsoft asking for a partial rehearing of the case. Procedurally, the move
bodes well for Microsoft, suggesting the court might hear the company's
request.
(END) DOW JONES NEWS 07-19-01
10:44 PM
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