Microsoft Warns of Profit, Sales Shortfall Next Quarter

Microsoft Corp., dogged by a slump in personal computer sales that the software giant expects to continue or even worsen in the coming months, warned that its fiscal first-quarter earnings and revenue will fall short of Wall Street’s expectations.

“We believe PC shipments are likely to deteriorate before turning around in 2002,” Chief Financial Officer John Connors said Thursday.

Shares of Microsoft fell $3.37 to $69.20 in after-hours trading after finishing the regular session up $2 at $72.57 on Nasdaq.

“The PC market is growing much slower than people think,” said Christian Koch, an analyst with Trusco Capital Management, which holds shares in Microsoft. “The high-unit growth days are basically over. It’s a mature industry.”

But Microsoft tried to put a positive spin on the news, predicting that the company’s new desktop operating system, Windows XP, would boost sales somewhat after the product is released in October during the company’s fiscal second quarter.

Greg Vogel, an analyst with Banc of America Securities, said the warning puts even more pressure on Microsoft for Windows XP to be successful.

“While XP looks to be a pretty strong product and a somewhat important upgrade . . . there may not be enough to get [consumers] to run out and upgrade as they did with Windows 95,” Vogel said.

Connors said the company also is hoping its efforts to diversify beyond the operating system, with such offerings as the Xbox gaming system due out in November, will help counteract the slowdown.

The sobering news came as Microsoft reported a dramatic drop in net income to $66 million for the fourth quarter, which ended June 30, down from $2.41 billion a year earlier. Much of the decline was due to investment losses, which totaled $2.62 billion.

Microsoft’s fourth-quarter revenue rose from $5.8 billion in 2000 to $6.58 billion, a 13% increase.

Analysts polled by First Call/Thomson Financial had predicted earnings of 43 cents a share before the charge. Microsoft did not provide a comparable figure in its earnings release.

The company also warned that its earnings for the first quarter of fiscal 2002, which ends Sept. 30, would be lower than expected, coming in at about 40 cents a share on revenue of about $6 billion to $6.2 billion. Analysts had expected the company to post a quarterly profit of 45 cents a share.

The company expects sales of computers to remain flat through the first quarter before rising into mid-single digits for the rest of the fiscal year, which should boost revenue. Executives cautioned that such forecasts assumed that the economy would not decline any further.

But Connors said it’s possible PC sales won’t pick up. “If that would happen, our profitability would be lower,” he said.

Microsoft faces a relatively cloudy future, entering new and rabidly competitive markets, such as consoles for video games.

The company’s Xbox system will go head to head with industry giants Nintendo Corp. and Sony Corp. in November. With the systems priced at less than $300, experts say, Microsoft may lose more than $100 for every Xbox it sells. Microsoft executives admitted that Xbox initially will be a drag on earnings, but they believe that it will be a profitable investment in the long term.

For the fiscal year ended June 30, Microsoft had income of $7.35 billion, or $1.32 a share, on revenue of $25.3 billion. For fiscal year 2000, income was $9.42 billion, or $1.70 a share, on revenue of $22.96 billion.

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Times wire services were used in compiling this report.