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Microsoft Sees Sales Slow on Security Fears

Times Staff Writer

Microsoft Corp. said Thursday that its fiscal first-quarter sales rose at the slowest pace in more than three years while new contract signings slipped more than expected because of concerns about the security of Windows products.

Revenue in the quarter ended Sept. 30 grew 6.1% to $8.22 billion from $7.75 billion a year earlier, the smallest percentage increase since the last quarter of fiscal 2000.

Profit declined to $2.61 billion, or 24 cents a share, from $2.73 billion, or 25 cents, because the company started counting stock-option grants as an expense. Microsoft on Thursday adjusted the year-earlier results to reflect the accounting change for option grants, unofficially reducing that quarter’s net income to $2.04 billion, or 19 cents a share.

The slowdown in sales had been anticipated. Microsoft shifted many of its large customers to multiyear licensing agreements last year, generating a temporary bulge in revenue.

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Analysts were more concerned that new multiyear licensing agreements -- a key indicator of future revenue -- weren’t being signed as quickly as Microsoft had anticipated. The telltale sign was a drop in the amount of licensing business that was booked, from more than $9 billion in its fiscal fourth quarter to $8.25 billion in the most recent quarter.

Drew Brosseau, an SG Cowen Securities analyst, had expected the figure to come in around $8.7 billion.

“We’re trying to figure out whether it’s an anomaly. We’re not sure,” said Brosseau, who owns no Microsoft shares and whose firm does no banking business with the Redmond, Wash.-based company.

If it continues, the slowdown in new licensing deals probably will reduce Microsoft’s annual revenue by $1 billion and its full-year profit by 3 cents a share, said Rick Sherlund, an analyst with Goldman Sachs, which does business with the company.

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“Basically, they’re eliminating the upside from the economic recovery,” he said.

Shares of Microsoft, the world’s largest company by stock market value, fell nearly 5% to $27.54 in after-hours trading. They had risen 2 cents to $28.91 in regular Nasdaq trading before the results were released.

Microsoft executives said technology sales to corporations were hurt by the summer’s outbreak of Internet worms and viruses designed to attack machines running Microsoft’s dominant Windows operating system.

Those security issues “diverted the focus of our customers, the sales force and the [distribution] channel away from closing deals,” said Chief Financial Officer John Connors.

But because Microsoft expects PC sales to consumers to continue their recent improvement, it raised its forecasts for the remainder of fiscal 2004. The company now expects revenue of $34.8 billion to $35.3 billion and profit of 86 cents to 88 cents a share. In July, it estimated full-year sales of $34.2 billion to $34.9 billion.

Although investors welcomed the revised forecast, they were concerned that the rise in computer sales wasn’t doing more to help the bottom line.

“It’s a gut feeling that they’re not benefiting as much from the strong PC unit growth as you would think,” said Chuck Jones, a money manager with Stein Roe Investment Counsel, which has Microsoft as a core holding. “It seems like there should be more upside there.”

Microsoft executives said the company’s Internet service, MSN, turned its first profit during the quarter despite a drop in the number of subscribers. Microsoft said advertising revenue grew 50% but wouldn’t reveal the size of the profit.

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