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Microsoft misses earnings forecast

Microsoft billionaire Bill Gates shakes hands with Intel CEO Paul Otellini during a conference in Seattle, Washington. PHOTO: REUTERS

Microsoft Corp said fiscal third-quarter sales and earnings rose less than forecast. The world's largest software maker reduced estimates for this quarter and fiscal 2003, sending the shares down 7.5 percent.

Net income in the period ended March 31 rose to US$2.74 billion, or US$0.49 a share, from US$2.45 billion, or US$0.44, a year earlier, Microsoft said. Sales rose 13 percent to US$7.25 billion from US$6.4 billion.

Microsoft's sales and profit are being hurt by lower-than-forecast sales of Xbox, its money-losing video-game console, and a slowdown in demand for personal-computer programs and corporate software. Chief Financial Officer John Connors in an interview said the market for PCs and software is still "challenging" as the US economy rebounds from a recession that began in March 2001.

"It's pretty disappointing," said Noah Blackstein, manager of the US$200 million Dynamic Power American Fund. He plans to sell the fund's holdings of 40,000 Microsoft shares. "They missed the numbers and they guided lower, and the stock's going to follow the earnings."

Microsoft shares dropped as low as US$52.15 after the earnings report. They fell US$0.26 to US$56.37 in regular US trading before the release. The stock has lost 17 percent in the past year.

For the recent quarter, Microsoft had forecast profit of US$0.50 to US$0.51 a share on sales of US$7.3 billion to US$7.4 billion. Net income for the quarter included a US$0.15 gain from the sale of Microsoft's stake in Internet travel service Expedia Inc, and a US$0.14 loss from impairment of investments.

The shortfalls last quarter and in the current period are mainly the result of disappointing sales of Xbox, which went on sale in the US in November, Connors said.

Chief Executive Steve Ballmer two weeks ago took on direct oversight of the Xbox business from President Rick Belluzzo, who investors said did a poor job managing Microsoft's consumer businesses. Belluzzo will leave the company later this year.

The software maker, which released the console in Europe and Japan last quarter, had predicted 4.5 million to 6 million in Xbox unit sales this fiscal year. Connors said Microsoft now expects to sell 3.5 million to 4 million of the devices. By the end of fiscal 2003, he expects to sell 9 million to 11 million units.

"Xbox sales in Europe and Japan were a little lighter than expected," said Connors, who declined to provide specific numbers.

Microsoft's challenge to Sony Corp's PlayStation 2 in Japan was hampered after the company was forced to repair or replace defective versions of the Xbox when customers complained the machine damaged some game disks.

Microsoft sold 190,000 Xbox consoles in Japan in the 5 1/2 weeks after its Feb. 22 release, taking a 3 percent share of the second-largest video-game market, researcher Enterbrain Inc said.

Sony sold more than 4 million PlayStation 2 consoles in Japan in the year to March, almost two-thirds of the country's market, the video-game researcher said.
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