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Microsoft Likely to Report Sluggish Profit Growth
Redmond, Washington, Oct. 13 (Bloomberg) -- Microsoft Corp., the worst performer in the Dow Jones Industrial Average this year, probably will report sluggish growth in fiscal first-quarter earnings on slowing sales of personal-computer software.
The world's largest software maker on Wednesday is forecast to report profit of 41 cents a share on revenue of about $5.7 billion for the quarter ended Sept. 30, the average estimate of analysts polled by First Call/Thomson Financial. That's up slightly from profit of $2.19 billion, or 40 cents, on revenue of $5.38 billion a year earlier.
Microsoft shares fell 69 cents to 53.69 in Nasdaq trading today after falling as much as 4 percent during the day amid speculation that the company wouldn't meet the forecast, J.P. Morgan & Co. analyst William Epifanio said in a note to clients. He said the company told him the speculation was false.
Analysts said they have modest expectations for the period as sales of corporate PCs slow and as Microsoft weathers a transition to a new version of its flagship Windows software for business computers, expected to be a major driver of future growth. Optimism for a strong quarter also has faded in the wake of reduced sales forecasts from Intel Corp. and Dell Computer Corp., two other PC-industry bellwethers.
``Given what we've heard from Intel, we find it difficult to believe Microsoft will report anything other than expected lackluster results for the quarter,'' said Christopher Shilakes, an analyst at Merrill Lynch & Co., who rates the stock near-term ``accumulate.''
Intel, whose microprocessors power the majority of computers that run Microsoft software, said on Sept. 21 that third-quarter sales would miss forecasts because of weaker demand in Europe. Some analysts also expressed concern about sluggish growth in the corporate PC market.
Redmond, Washington-based Microsoft may feel some of the same tremors that have shaken Intel, said Christian Koch, an analyst with Trusco Capital Management, which owns about 6 million shares of Microsoft. Expectations are conservative, though, and he sees the quarter as one of ``transition'' for the company.
Since Microsoft joined the Dow Jones Industrial Average on Nov. 1, its shares have sagged 42 percent. In trading today, Microsoft shares fell while the Nasdaq Composite Index surged 7.9 percent, its second biggest gain ever.
Microsoft stock has fallen 54 percent this year.
Conservative Expectations
``Microsoft set expectations very conservatively, so they'll be OK,'' said Christopher Mortenson, an analyst at Deutsche Banc Alex. Brown, who rates the shares ``buy.''
In the fiscal fourth quarter, Microsoft's 9.4 percent earnings growth was its slowest increase in five years. At the time, the company said it didn't expect sales of PCs to businesses to pick up significantly until the December quarter.
Worldwide shipments of PCs in the September quarter are expected to have risen 18.5 percent over a year ago, compared with 24.7 percent growth in the same quarter last year, according to market researcher IDC.
``Next quarter is more important for them,'' said CIBC World Markets Inc. analyst Melissa Eisenstat, who has a ``buy'' rating on the stock.
Some analysts are looking ahead with anxiety.
Scott McAdams, chief executive of Seattle-based McAdams Wright Ragen Inc., has followed Microsoft for more than a decade and recommends its shares to clients. Still, he's getting weary waiting for good news.
``I'm a fatigued bull on this stock,'' he said. ``At some point it either turns around or you've got to admit you're wrong. Some people will wait for the December quarter and some for March, but if it doesn't recover within a six-month window they will start to lose faith.''
The company's market capitalization has dropped to less than $300 billion today from $596 billion in December 1999.
Corporate Spending
The focus of corporate technology spending has shifted more toward such Internet software as Web-commerce tools and away from software for PCs, Trusco analyst Koch said.
``The priority in dollars has shifted,'' he said.
Desktop software, including business and consumer versions of the company's Windows operating system and Office productivity software, accounted for 71 percent of the company's revenue in fiscal 2000.
Sales of Microsoft's Windows 2000, the successor to Windows NT that was released in February, still haven't taken off, analysts said. They expect Windows 2000, which runs corporate computer networks and Web sites, to provide a slight boost for the September quarter and gain momentum later this year.
``They're just in a product transition. Windows NT is a little long in the tooth, and Windows 2000 hasn't really caught on yet,'' said Lehman Brothers Inc. analyst Michael Stanek, who rates the stock ``buy.''
For Windows 2000, December results will be critical, said Aaron Scott, an analyst at Tucker Anthony Capital Markets, who rates the stock ``buy.''
``If I find the corporate buyers aren't buying Windows 2000, I wouldn't hesitate to downgrade then.''
Like many of its multinational counterparts, Microsoft's earnings also may be hurt by the weak euro, perhaps by 1 or 2 cents a share, said Scott.
Antitrust Case
A federal judge's order that Microsoft be split into two separate companies remains on investors' minds, yet analysts say the case won't affect the stock for at least several months. The judge concluded earlier this year that Microsoft illegally defended its Windows monopoly by bullying computer makers to exclude rival software.
An appeals court has scheduled hearings in February and a decision is expected a few months later, followed by an appeal to the U.S. Supreme Court.
Investors are used to the legal shadow over Microsoft, said Trusco's Koch. ``The longer the time that this gets drawn out, the better it is for the company.''
Meantime, he said, the stock ``appears to be at oversold levels'' and should weather the pressure on technology stocks.
Oct/13/2000 16:16 ET
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