Microsoft Corp on Thursday said sales and profit will fall short of forecasts for the current quarter because fewer customers are buying personal computers, which generate most of the biggest software maker's revenue.
The company's shares dropped 4.6 percent after it said profit in the first quarter ending in September will be US$0.39 or US$0.40 a share on sales of US$6 billion to US$6.2 billion. Microsoft was expected to earn US$0.45 on revenue of US$6.27 billion, the average estimates in a First Call/Thomson Financial poll of analysts.
Microsoft's Windows operating system runs 90 percent of PCs.
Consumers and businesses have reduced spending on the machines as economic growth slows worldwide, curbing sales of Windows and other PC software. At the same time, Microsoft must keep convincing corporations that are cutting costs to upgrade to new business software, which is more expensive and generates higher profit.
"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." Redmond, Washington-based Microsoft's shares dropped to US$69.20 after the report. They had climbed US$2 to US$72.57 before the release.
The stock has gained 67 percent this year, making it the top performer in the Dow Jones Industrial Average.
Microsoft Chief Financial Officer John Connors said computer sales and the US economy may start to recover later this year after Microsoft starts selling its new Windows XP operating system, and as spending is buoyed by a US tax cut and Federal Reserve interest-rate reductions.
In the fiscal first quarter a year ago, the company had earnings of US$0.46 a share on sales of $5.8 billion.
For the year, the company forecast earnings of US$1.91 to US$1.95 a share on revenue of US$28.8 billion to US$29.5 billion. The average estimates in a First Call poll of analysts are for profit of US$1.94 a share on sales of US$28.8 billion.
Connors said sales of the company's Xbox game console, growth in its MSN Internet business and further gains in sales of business software will boost sales for the year. The company will sell 4.5 million to 6 million Xbox machines in the fiscal year, he said.
Investments in new products and the money-losing game console, Microsoft's first, will narrow profit margins.
"We are doing a fine job adding revenue, and this year we made good progress in terms of moderating the expense growth," Connors said. "Fiscal year 2002 is a heavy investment year, but going into 2003 we should see an improvement in the drag on our margins."
Microsoft's profit from operations in the fourth quarter ended June 30 was about US$2.5 billion, or US$0.43 a share, Connors said, matching analysts' estimates. That number excludes investment losses and a charge related to an acquisition.
Including the losses and the charge, net income was US$66 million, or US$0.01 a share. In the year-ago period, the company had net income of US$2.41 billion, or US$0.44 a share.
Sales rose 13 percent to US$6.58 billion from US$5.8 billion a year earlier. Sales for the fiscal year grew 10 percent, the slowest annual sales growth since Microsoft first sold shares to the public in 1986.
Connors forecast PC sales growth in the "mid-single digits" in Microsoft's fiscal year that began this month. Growth in the first quarter will be less than that, or sales may not rise at all, he said.
Microsoft in the past two quarters has been able to boost sales of Windows for PCs at a faster rate that PCs sales grew. The company might be able to repeat that in the current quarter, said Scott McAdams, chief executive at McAdams Wright Ragen. Connors may have "lowballed" the estimates because Microsoft wants to set expectations at a level he is sure the company can exceed, he said.
"The economy isn't showing any signs of life," McAdams said.
"I don't know anyone that wants to be aggressive with these numbers right now." Microsoft exceeded sales estimates for the fourth quarter by getting more companies to use its Windows 2000 program for business PCs, which costs about 50 percent more than consumer versions of Windows that most businesses used to buy.
"Having no competitors in the operating system, they can price pretty much anywhere they want," said Craig Stone, an analyst at Kayne Anderson Rudnick Investment Management in Los Angeles.
Microsoft also has sold more copies of its Windows 2000 software for running server computers, and other server programs such as database and electronic-mail software. Sales of such software rose 20 percent in the recent quarter to US$1.29 billion.
The company expects sales of server software to rise just less than 20 percent in the current period. Sales of Windows for PCs will climb "only slightly," Connors said, because of slack PC demand and because companies will wait to buy Windows XP, which will go on sale in October.
Microsoft and PC makers such as Hewlett Packard Co and Compaq Computer Corp are counting on Windows XP and the holiday sales season to help revive the ailing PC market. While some PC analysts have said the recovery may take some time, Connors says he's confident Windows XP can serve as a catalyst for the first signs of a PC boost that will pick up steam in 2002.
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