Microsoft fourth quarter seen up on new licensing plan
By Reed Stevenson
(Adds analyst comments, detail)
SEATTLE, July 10 (Reuters) - At a time when other software and computer hardware companies are being hit hard by the slump in corporate spending, Microsoft Corp. (NasdaqNM:MSFT - News) appears on track to post a fourth-quarter profit at the high end of its own guidance, analysts said.
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Microsoft's results, due after the close of U.S. markets on July 18, will be closely watched for how the software giant views the outlook for personal computer sales, which have remained weak despite signs of an economic recovery.
Many analysts expect Microsoft to report fourth quarter earnings at the upper end of the 41 to 42-cents-per-share range that it has projected.
The more bullish see even better results: Credit Suisse First Boston's George Gilbert is calling for a net profit of 45 cents per share and Sanford C. Bernstein & Co.'s Charles Di Bona is expecting 46 cents per share.
The average forecast of the 25 analysts surveyed by Thomson First Call was for 42 cents per share, excluding goodwill charges.
In the previous year, Microsoft had a net profit of $66 million, or 1 cent per share, after taking a charge for investment losses.
The consensus forecast calls for sales of $7.06 billion, up from $6.6 billion a year earlier.
Intel Corp. (NasdaqNM:INTC - News) and Advanced Micro Devices Inc., (NYSE:AMD - News), which make the chips that Microsoft's Windows operating system runs on, recently warned that the protracted year-long slump in PC sales had forced them to pare back their own estimates for the just-ended quarter.
Analysts said Microsoft was also hit by weaker PC demand, but noted an upcoming shift in its licensing strategy helped protect revenue during the last quarter of its fiscal year.
"We think Microsoft's June quarter remains on track despite Intel's preliminary results," Prudential Securities analyst John McPeake wrote in a recent report.
Redmond, Washington-based Microsoft still relies on its desktop segment for two-thirds of its revenue. In the fiscal year-to-date, 33.5 percent of sales were from desktop applications, such as the Office, while 32.5 percent came from sales of its Windows series of operating systems.
The software giant has been diversifying into new areas, such as high-end enterprise software and consumer-oriented products such as its 8-month-old Xbox video game console.
LICENSING SCHEME KICKS IN
The main reason analysts see a resilient fourth quarter is a rush of buying ahead of an upcoming change in Microsoft's licensing practices, effective after July 31, when most customers will be encouraged to sign up for its new "Software Assurance" program.
Under the new subscription plan, customers will pay a regular fee to receive periodic software upgrades when they become available, instead of making large payments when they shift to a newer version of software.
A combination of signups for the new program and last-minute orders by others who want to avoid being locked into an upgrade path has supported revenue, said Brendan Barnicle of Seattle-based Pacific Crest Securities.
"I think Microsoft has been unusual in that it probably had a pretty decent quarter. said Barnicle, who has a "buy" rating on Microsoft's stock.
At $52.24 on Wednesday, Microsoft stock was nearly unchanged over the last three months, compared to database software rival Oracle Corp. (NasdaqNM:ORCL - News) and the Nasdaq index, both of which lost a fifth of their value in the same period.
Over the next few years, Prudential's McPeake said that the new licensing plan will provide more stable revenue growth that will not be as closely linked to the cycle of PC sales.
RISK OF SLOWER GROWTH
Microsoft, known for its conservative guidance, is expected to offer a cautious view for the current quarter.
In April, Chief Financial Officer John Conners said that PC sales might be better then expected but that corporate spending on technology would likely be weak.
"Given the slowdown (in PC sales), Microsoft may back away from those comments," Barnicle said. "The main risk is that their guidance for the September quarter will be lower than current consensus estimates.
For the three months to September, analysts are expecting a repeat performance of the third quarter, with average per-share earnings of 42 cents on sales of $7 billion, according to First Call.
Further signs of a weaker sales outlook would heighten concerns that Microsoft's underlying profitability is deteriorating as it invests in new businesses.
Microsoft is expecting revenue for the full fiscal year that ended in June to be $28.8 billion to $29.1 billion, up as much as 15 percent from a year earlier.
While respectable, analysts see that as a sign of slower growth as the software giant matures. Just a few years ago, Microsoft posted yearly growth rates of around 30 percent.
In the next year to June 2003, Microsoft expects revenue to be $31.5 billion to 32.4 billion, representing marginally slower growth, and a net profit of $1.89 to 1.92 per share. |
