News > Technology
Microsoft will miss estimates
December 14, 2000: 6:19 p.m. ET

Slowdown in PC sales, corporate spending blamed for shortfall
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NEW YORK (CNNfn) - Software giant Microsoft became the latest technology company to issue an earnings warning Thursday, telling investors that a worldwide slowdown in personal computer sales will result in disappointing profits and revenues.

In a statement issued after the closing bell, Microsoft (MSFT: Research, Estimates) said its revenue for the quarter is now expected to be between $6.4 billion and $6.5 billion, while earnings per share will come in between 46 cents and 47 cents.

That's 5 to 6 percent below the company's prior guidance. The most recent consensus estimate of analysts polled by earnings tracker First Call was for Microsoft to earn 49 cents per share on revenue roughly $6.8 billion.

graphicThe second-quarter shortfall widely regarded as one of the busiest periods for the PC industry because it contains the holiday shopping season means Microsoft will also post disappointing results for the entire fiscal year.

Goldman Sachs analyst Rick Sherlund called the warning "a big miss," adding it was the first time in 10 years that Microsoft had issued a sales warning. Sherlund reduced his revenue and earnings forecasts on Microsoft last week, citing warning signs of slowing PC growth.

Microsoft said it now expects fiscal 2001 revenue to be between $25.2 billion and $25.4 billion, which is about 5 percent below its previous forecast. Earnings per share in fiscal 2001 are now expected to be in the range of $1.80 to $1.82, compared with the Street's expectations of $1.91, according to the First Call survey.

Executives at Microsoft, the world's largest supplier of operating systems for personal computers, blamed a slowdown in PC sales and corporate spending for the shortfall. The Redmond, Wash.-based company is the latest PC-related firm to issue such a warning.

Similar warnings have come in recent weeks from PC vendors including Compaq (CPQ: Research, Estimates), Gateway (GTW: Research, Estimates) and Hewlett-Packard (HWP: Research, Estimates), as well as PC processor makers Intel (INTC: Research, Estimates) and Advanced Micro Devices (AMD: Research, Estimates).

All of them cited similar reasons for their shortfalls.

"We believe, like many technology companies, that the current weakness in worldwide economic conditions is resulting in a slowdown in PC sales, corporate IT spending and consumer online services and advertising," Microsoft chief financial officer John Connors said in a teleconference with analysts Thursday evening.

graphic"Like many others in the industry, we are seeing slowing PC sales as the quarter progresses," Connors added.

A recent survey conducted by First Call, a firm that tracks corporate earnings results and trends, showed that analysts are now expecting roughly 9 percent profit growth in the technology sector as a whole during the fourth calendar quarter. In late October, they had been expecting growth of about 29 percent, according to First Call research director Chuck Hill.

Microsoft's slowdown is centered on the consumer segment and has primarily affected its desktop applications business, which includes its Microsoft Office suite, Connors said. He added that Microsoft has lowered its forecast a couple of percentage points from its recent expectation for growth in the "mid-teens."

Revenue from the company's Microsoft Network Internet service also has been weighed down by the growing weakness in the market for Internet advertising, he said.

Meanwhile, enterprise software and services revenue which includes Windows 2000 Server, SQL Server, Exchange Server, and Developer Tools was not as hard hit, Connors said.

Several analysts recently have raised red flags, saying that the adoption of Windows 2000 has not been as fast as Microsoft had expected. "The enterprise space appears to be impacted less than the consumer PC space as well as the consumer online segment," Connors said.

Connors declined to provide specific details about expectations for Microsoft's various business units or about the company's expectations beyond its current fiscal year, which ends in June. He said Microsoft will provide those details during its analysts' conference next month.

However, he said he remains "a bull on the technology industry" over the long term and said Microsoft will continue to aggressively develop new products and services.

"We have a philosophy based on investing for the future, and that philosophy has served us very well for many years," he said.

After losing $1.75 to close at $55.50 on Nasdaq ahead of the earnings warning, Microsoft shares tumbled another $3.31, or 6 percent, to $52.19 in after-hours trade.

Microsoft is expected to report its fiscal second-quarter results on Jan. 18. graphic


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