Bellwethers’ Forecasts Ease Tech Concerns
Microsoft Corp. and Intel Corp., the twin engines of the personal computer industry, issued relatively optimistic earnings projections Tuesday, further cheering investors on the heels of Monday’s solid report from IBM Corp.
Instead of blaming geopolitical uncertainty for disappointing results, as Oracle Corp. and some smaller firms have, the three bellwether companies predicted that the coming year would be better than the last.
Microsoft said fiscal third-quarter profit grew slightly from the same period a year earlier, driven by the adoption of policies that prompted many large customers to begin paying annual subscription fees for software packages instead of buying one version outright.
Profit for the Redmond, Wash., company climbed to $2.79 billion, or 26 cents a share, from $2.74 billion, or 25 cents. Revenue rose 8% to $7.84 billion.
“It was a good quarter. We’re seeing the strength of the subscription model,” said analyst Charles Di Bona of Sanford C. Bernstein, who rates Microsoft shares “outperform” but doesn’t own any. His firm does no investment banking.
Although the maker of the dominant operating system for personal computers said revenue for the fiscal year beginning in July would be lower than some had predicted, analysts said they were relieved the guidance wasn’t worse.
“It was better than a lot of the more fearful expectations,” said analyst Drew Brosseau, who owns no Microsoft shares and whose firm, SG Cowen, does no investment banking with Microsoft. He also rates Microsoft shares “outperform.”
Microsoft Chief Financial Officer John Connors said that sales to big business in the last two weeks of March had been weaker than expected and that economic conditions remained uncertain.
“We are exiting a difficult year and entering an uncertain one,” Connors told investors and analysts on a conference call.
Yet even assuming that business spending fails to pick up, Connors forecast a good fiscal fourth quarter and a healthy 2004 fiscal year. For the 12 months starting in July, he said, he expected revenue of $33.1 billion to $33.8 billion, with earnings per share of $1.04 to $1.06.
Those figures are slightly below analyst expectations. Microsoft is usually modest in making forecasts.
During the third quarter, revenue from Windows operating systems grew 10% to $2.54 billion from $2.3 billion. Sales of server systems for running computer networks, databases and e-mail rose even faster, up 21% to $1.83 billion from $1.51 billion in the third quarter a year earlier.
Microsoft said it was gaining market share in operating systems for server computers and in database programs. The company also plans to intensify its efforts to sell to small and mid-sized businesses, government agencies and schools.
Connors said the company continued to face risks from the economy, litigation and the growth of Linux and other non-proprietary software.
Microsoft shares, which had fallen 14 cents in regular Nasdaq trading to $24.61, jumped to $25.75 after the markets closed and the company released its report.
Intel surprised investors with first-quarter earnings of $915 million, down just 2% from $936 million in the same period a year earlier. Revenue was essentially flat at $6.75 billion, compared with $6.78 billion, and earnings per share held steady at 14 cents.
The results indicate that the world’s largest maker of semiconductors is holding up amid the information technology market’s worst downturn, analysts said.
“They believe that things are gradually improving,” said analyst John Lau of RBC Capital Markets, who does not own Intel shares or have an investment relationship with the chip maker. “Probably the worst is behind them.”
Intel Chief Financial Officer Andy Bryant was upbeat about the firm’s second quarter as well.
“Does it feel like any kind of recovery? No, but it feels modestly better,” he said in a conference call with industry analysts. “What I don’t want to do is get carried away, but we actually do feel a little more confident.”
Intel shares jumped to $18.06 in after-hours trading after the earnings release. They had dropped 3 cents to close at $17.13 in regular Nasdaq trading.
Intel’s first-quarter results were hurt by slower-than- expected sales of flash memory chips, which are used in cell phones, digital cameras and electronic organizers and retain data when the devices are turned off. But computer microprocessor sales were stronger than expected.
“It’s very positive,” said Lau, who rates Intel shares “outperform.” “The gross margins came in around 52%, and that indicates that on the operational side they continued to do very well.”
Bryant said microprocessor sales probably would be boosted by a series of new chips, including the just released Pentium-M, Intel’s first chip designed specifically for laptop computers that enables longer battery life. When Intel rolled out its Centrino wireless chip package for laptops -- which includes the Pentium-M processor -- it described it as its biggest initiative since the original Pentium chip was introduced. The Santa Clara, Calif., company hopes that additional chips for personal computers, workstations and corporate servers will maintain momentum during the rest of the year.
“Intel’s revenues have shown a lot of stability over the past year or so, and certainly stability is better than decline,” said Joe Byrne, an analyst with technology market research firm Gartner Dataquest.
“We’re not in a mode of a full-fledged recovery yet, but we’re in a mode of stability with some room for optimism as people upgrade their computers and emerging markets continue to grow,” he said.
On Monday, IBM said quarterly earnings were higher for the first time in almost two years. Net income for the world’s biggest computer company in the first quarter was $1.38 billion, up 16% from the 2002 quarter.
Separately Tuesday, Microsoft said it would pay as much as $202 million to settle an antitrust suit in Florida. Consumers and businesses would get vouchers good toward the purchase of any manufacturers’ computers or software, the company said. Half of any money not claimed would go to Florida public schools serving poor neighborhoods.
Bloomberg News was used in compiling this report.
