Microsoft Says 3rd-Qtr Net Rises; Reduces Forecasts (Update5)
By Dina Bass
Redmond, Washington, April 18 (Bloomberg) -- Microsoft Corp. said fiscal third-quarter sales and earnings rose less than forecast. The world's largest software maker reduced estimates for this quarter and fiscal 2003, sending the shares down 7.5 percent.
Net income in the period ended March 31 rose to $2.74 billion, or 49 cents a share, from $2.45 billion, or 44 cents, a year earlier, Microsoft said. Sales rose 13 percent to $7.25 billion from $6.4 billion.
Microsoft's sales and profit are being hurt by lower-than- forecast sales of Xbox, its money-losing video-game console, and a slowdown in demand for personal-computer programs and corporate software. Chief Financial Officer John Connors in an interview said the market for PCs and software is still ``challenging'' as the U.S. economy rebounds from a recession that began in March 2001.
``It's pretty disappointing,'' said Noah Blackstein, manager of the $200 million Dynamic Power American Fund. He plans to sell the fund's holdings of 40,000 Microsoft shares today. ``They missed the numbers and they guided lower, and the stock's going to follow the earnings.''
Microsoft shares dropped as low as $52.15 after the earnings report. They fell 26 cents to $56.37 in regular U.S. trading before the release. The stock has lost 17 percent in the past year.
For the recent quarter, Microsoft had forecast profit of 50 cents to 51 cents a share on sales of $7.3 billion to $7.4 billion. Net income for the quarter included a 15-cent gain from the sale of Microsoft's stake in Internet travel service Expedia Inc., and a 14-cent loss from impairment of investments.
Xbox
The shortfalls last quarter and in the current period are mainly the result of disappointing sales of Xbox, which went on sale in the U.S. in November, Connors said.
Chief Executive Steve Ballmer two weeks ago took on direct oversight of the Xbox business from President Rick Belluzzo, who investors said did a poor job managing Microsoft's consumer businesses. Belluzzo will leave the company later this year.
The software maker, which released the console in Europe and Japan last quarter, had predicted 4.5 million to 6 million in Xbox unit sales this fiscal year. Connors said Microsoft now expects to sell 3.5 million to 4 million of the devices. By the end of fiscal 2003, he expects to sell 9 million to 11 million units.
``Xbox sales in Europe and Japan were a little lighter than expected,'' said Connors, who declined to provide specific numbers.
Sales in the period ending in June will be $7 billion to $7.1 billion, the Redmond, Washington-based company said, while analysts surveyed by Thomson Financial/First Call on average expected $7.65 billion. Profit this period will be 41 cents to 42 cents a share, compared with the average forecast for 44 cents.
Profit for the year beginning in July will be $1.89 to $1.92 a share, Microsoft said. Analysts polled by First Call expected an average of $2.01 a share. Sales will be $31.5 billion to $32.4 billion, less than forecasts for $32.6 billion.
Spending
Microsoft plans to spend about $800 million more than analysts estimated in fiscal 2003 on product development, research and investment, Connors said. The company will hire more employees and give workers raises, he said.
The investments will be made in areas such as building up the sales force for small and medium-sized business products, server software and programs for developers, Connors said. Microsoft also will invest in security and financial incentives to gain customers for its Internet service, as well as Xbox and software for tablet- sized PCs, storage and mobile devices.
``We have to make prudent and sometimes difficult short-term profit decisions to sow the seeds of the future,'' Connors said on a conference call.
PC Demand
Some investors disagreed. John Faig, analyst at American Express Financial Advisors, which manages about $100 billion in equities and held 30 million Microsoft shares as of December, said the company should focus more on profit margins.
``The top line has stalled,'' he said. ``They spend a huge amount on R&D. They should pull back.''
Gross margin, or the percentage of sales left after subtracting production costs, narrowed to 81 percent in the recent period from 86 percent a year earlier, squeezed by unprofitable products such as Xbox and Internet services.
The company is predicting that demand for computers and software will be worse than many analysts expect, he said.
Unit sales of PCs will rise at a percentage in the ``small single digits'' in fiscal 2003, Connors said. Companies also are reluctant to spend on server computers that run networks and Web sites.
Windows XP
Sales of the Windows XP program for PCs fueled an 11 percent third-quarter gain in PC operating-system sales to $2.29 billion. The program, which went on sale in October, has sold more than 32 million copies.
Sales of software and services for servers rose 1.8 percent from a year ago to $1.28 billion. Analyst John McPeake at Prudential Securities expected growth of 9.5 percent.
The slower growth came as more server programs are being sold through multiyear contracts, where Microsoft recognizes revenue over the term of a contract instead of up front, Controller Scott Boggs said on a conference call. |
