Microsoft earnings seen squeaking amid PC slowdown

By Scott Hillis

SEATTLE: Microsoft Corporation is set to report earnings this week, and while the software giant has stuck to its guidance, many analysts expect the company to barely make the low end of its numbers due to the slumping computer market.

Microsoft is expected to post a profit of 42 cents a share on Thursday for its third quarter ended March 31, down from the 43 cents a share a year earlier, according to the consensus analyst estimate compiled by Thomson Financial/First Call.

Redmond, Washington-based Microsoft, which makes the Windows operating system, has stuck to guidance it gave during its last earnings report that revenues will come in at $6.3 billion to $6.4 billion with profits of 42 cents to 43 cents a share. But many analysts, sobered by lackluster personal computer demand, have ratcheted down their numbers, with some expecting sales of just $6 billion and profits as low as 40 cents a share.

"Nobody's looking for what their original guidance was because generally growth and spending on PCs isn't as strong as everybody thought," said Andrew Brousseau, an analyst with SG Cowen Securities. "When all is said and done, that's still the bulk of their revenues," Brousseau said.

But some say that despite slower sales of new PCs, there are positive signs, like evidence that Microsoft has been able to raise prices for newer versions of Windows and Office. "I actually think there's a possibility they could beat the consensus. There's been a little more positive data," said Brendan Barnicle of Pacific Crest Securities.

Feeling the pinch

For the past few quarters, Microsoft has been caught between slowing PC buying and the market saturation of its main products, Windows and the Office package of business software. Analysts are split on the outlook.

Some feel those two issues will continue to pinch Microsoft even into 2002, while others say new versions of Windows and Office, due out later this year, will restart growth. "The question is where things are going forward. That's kind of all over the map," said Jonathan Geurkink, an analyst with Well Fargo Van Kasper. Most aren't betting on a quick recovery, Geurkink said.

"It's still too early. It's going to take a little while to sort out the pieces. Near-term, there's not much in the economy that's getting businesses eager to get out and get spending," Geurkink said.

However, even though new PC shipments are in the doldrums, more than half of Microsoft's $4.5 billion in desktop software sales last quarter came from upgrades to existing machines, said John Puricelli, an analyst with AG. Edwards & Sons.

"An area people are underestimating is the upgrade business," Puricelli said, adding that while Microsoft's fate is thought of as closely tied to the PC market, only 31 per cent of its revenues last quarter came from software on new PCs. Microsoft has also been tapping its coffers, bulging with $27 billion in cash and equivalents, to step up marketing for corporate software like the Windows 2000 operating system.

Launched in February of last year, Windows 2000 disappointed some analysts and industry observers who expected a sharper climb in initial sales. Analysts will want confirmation that the software is gaining momentum as corporations finally get around to opening their wallets after months of evaluation and budget planning.

New products

Importantly, they want a peek at what Microsoft expects for new products in the months ahead. The company has several major products coming out. The new version of Office, called Office XP, goes on sale on May 31. Microsoft is hoping the product, with new collaborative features, will spur upgrades among customers who have been content with existing versions.

In the second half of the year, Microsoft will release Windows XP, which is the most important upgrade to the consumer platform since Windows 95. In fact, Microsoft thinks that product is so good it could restart sales of new PCs. But Pacific Crest's Barnicle warned that if the overall economy fails to pick up, the appetite for new and untried products could be limited.

"If we were in better macro environment, they'd probably be doing phenomenally well ... but given the slow spending in information technology, new products aren't all that positive," Barnicle said. Also of interest will be details of Microsoft's consumer division, which includes its fast-growing MSN Internet access and content business, and the upcoming Xbox video game console that will duke it out against Sony's PlayStation 2.

(C) Reuters Limited 2001.