Microsoft Beats Forecasts
Microsoft Corp. blew past estimates of its sales and profit for the last three months of 2001, but the software giant’s stock price dipped late Thursday after it reduced expectations for the next six months.
The world’s largest maker of desktop computer operating systems said it expects PC sales to fall slightly in the first six months of this year, reversing a forecast in October of a 2% increase.
“Microsoft [and other major tech companies reporting earnings] are throwing a little cold water on the optimism investors had that things are getting better,” said Rick Sherlund, an analyst with Goldman Sachs. “In terms of the pace of recovery, Microsoft turned the dial back a little bit.”
Combined with economic deterioration in the key market of Japan and slowed corporate spending in the U.S., the PC slump should give Microsoft a lower operating profit in the current quarter than analysts have forecast the company said.
“People are expecting a quite strong economic recovery. I think it’s from our perspective too early to call that,” Microsoft Chief Financial Officer John Connors said.
Microsoft shares rose $1.99 to $69.86 in regular trading Thursday on Nasdaq, then fell to $67.90 in after-hours trading after the earnings report.
The Redmond, Wash.-based company scaled back its near-term profit assumptions, a shift that represents the success of one of its financial approaches.
Concerned that big businesses have less need than before to switch to newer Windows operating systems and such application suites as Microsoft Office, the company has been prodding corporate customers to sign longer-term, more-expensive contracts that include automatic upgrades.
Connors told investors that the plan was ahead of schedule. Under accounting rules, that means a lot of the revenue that Microsoft used to collect immediately has now been deferred to once-a-year bills. The result: short-term earnings will decline, but the longer-term profit will rise.
Microsoft also said it topped internal expectations for the launch of the Xbox game console, selling 1.5 million systems in the quarter, and did better than it had thought with the new Windows XP operating system, licensing 17 million copies.
Those sales helped Microsoft earn $2.8 billion in its third quarter of 2001, or 49 cents a share, before a $660-million pretax charge for the possible settlement of class-action lawsuits. That per-share profit and revenue of $7.7 billion easily topped expectations of 43 cents and about $7.2 billion.
“They just posted a very impressive quarter,” said analyst Jim Moore of Deutsche Bank. “Everything is going in their favor except for PC growth.”
Citing economic conditions in Japan and Europe and standard promotions of new products, Microsoft warned that the bulge in Windows XP and Xbox sales probably will not continue.
And Microsoft is losing more profitable server-software revenue while gaining low- or no-margin Xbox revenue, Sherlund said.
Moore and other analysts suggested that the company might be steering expectations too low.
“The biggest variable for the business is PC growth,” Moore said. “Investors are going to have to sort through how much of this is being conservative.”
