Today is Good Friday. Will Monday be so kind?
April 21, 2000
Microsoft Sees Some Bumps in Its Earnings
Forecast Overshadows a Third-Quarter Gain
By LAWRENCE M. FISHER
Microsoft reported yesterday that third-quarter earnings were a couple of cents above Wall Street's expectations, but the number everyone was watching from this bellwether of the PC industry was revenue, which trailed most analysts' estimates.
The softness in the quarter was largely anticipated, but the company also urged analysts to reduce estimates for future revenue and earnings as well.
Last week Rick Sherlund, an analyst with Goldman, Sachs, issued a report suggesting that Microsoft's growth had slowed in the quarter, which contributed in large part to the sizable Nasdaq correction. And several PC companies had talked of slower-than-expected sales, which they attributed to corporations deferring purchases until the release of Microsoft's Windows 2000 operating system on Feb. 17.
In their conference call with securities analysts, Microsoft executives took an at-times defensive, at-times defiant tone, at one point quoting Perseus, to the effect that "he conquers who endures."
At another point, they chided two competitors, Sun Microsystems and Oracle for lobbying federal regulators to break up Microsoft, a rare reference to the Justice Department's continuing antitrust suit.
Microsoft executives said they believed that the percentage growth in revenue in fiscal 2001 would slow to the midteens, and suggested that the earnings estimate was too high by about 5 cents. They said fourth-quarter 2000 revenues would be flat to slightly down relative to the third and earnings would be comparable.
Microsoft reported its results after the close of the market. In Nasdaq trading, Microsoft shares closed at $78.9375, up 25 cents, but they tumbled in after-hours trading, slipping as low as $73.75.
For the quarter ended March 31, Microsoft reported earnings of $2.39 billion, or 43 cents a diluted share, up 24 percent from $1.92 billion, or 35 cents a share, in the similar quarter last year. Revenue rose 23 percent, to $5.66 billion, from $4.60 billion in the 1999 third quarter.
Analysts had expected Microsoft to earn 41 cents a share, according to First Call/Thomson Financial. The so-called whisper number was 44 cents.
Analysts said Microsoft's disappointing numbers were bound to roil the market. Coming after so many quarters in which the company urged analysts to be conservative in their forecasts only to then blow the numbers away, any kind of slip is a cause for great concern. They noted that the revenue shortfall appeared to be directly related to customers' deferring purchases and said Microsoft's somewhat dour outlook contrasted with a more upbeat conference call with Intel earlier in the week.
"Each analyst was basically saying, 'Where's the upside here?', looking for some glimmer of hope," said William Epifanio II, an analyst with J. P. Morgan. "I couldn't find one thing to be optimistic about. The next catalyst for this stock is going to be Judge Jackson issuing his final decree, so I think a lot of people might be considering selling first and asking questions later. The tech tape Monday is not going to be pretty." He was referring to Thomas Penfield Jackson.
Although Microsoft had advised analysts last quarter that the adoption rate of Windows 2000, a corporate product, would not be as rapid as that of the consumer-oriented Windows 98, sales fell below even the company's estimates.
"We had expected business PC's to pick up more in the quarter than they did," John Connors, Microsoft's chief financial officer, said in a telephone interview. "We did see some demand increase in the March time frame, basically in the last three weeks, but not enough to offset the first two months." PC manufacturers "suffered from a shortage of Pentium III chips from Intel," he said.
Revenue from the licensing fees paid Microsoft by PC makers grew by just 5 percent in the quarter, to $1.7 billion. The average revenue per PC declined in the quarter, due to a greater percentage of machines shipped with the lower-cost Windows 98 rather than Windows 2000, the company said.
Microsoft's unearned income, which is the portion of income that it sets aside to reflect the long-term deployment of many of its products, grew to $4.46 billion from $4.2 billion a year ago, in line with internal expectations.
Mr. Connors said it was not realistic to expect continued 20 percent growth, but he said the company's growth in absolute terms remained impressive. "Year to date, we've grown revenues by over $3.1 billion," he said. "That's four and a half Yahoo's, 20 Real Networks, half of AOL and 75 percent of Oracle's products business, excluding services."
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