Microsoft seen making Q1 estimates, outlook muddy

Scott Hillis

SEATTLE: Microsoft Corp.'s line-up of popular business software is expected
to have insulated it from the economic fallout of the Sept. 11 attacks, with the
software giant meeting Wall Street expectations when it reports quarterly
results this week, analysts said on Tuesday.

But it remains to be seen if consumer jitters over the weakening economy will
affect Microsoft's two biggest upcoming products, the Windows XP operating
system and the Xbox video game console.

Several analysts said they believe Microsoft will lower guidance to take into
account the slowing economy and sluggish PC sales, which some say will be worse
than expected. "We expect the company to make the September quarter but to
lower forecasts slightly for the December quarter" and the full fiscal
year, Merrill Lynch analyst Henry Blodget wrote in a research note.

Microsoft is scheduled to report first fiscal quarter earnings on Thursday
after the markets close. One sign that business is on track for the first
quarter is that Microsoft has not warned that sales or profits were hurt by the
sharp spending slowdown in the wake of the hijack attacks on the World Trade
Center and the Pentagon.

Analysts polled by Wall Street tracking firm First Call/Thomson Financial
expect Microsoft to pull in $5.9 billion to $6.5 billion in revenue for its
first fiscal quarter ended Sept. 30, with profits of between 38 and 42 cents a
share.

"In light of the Sept. 11 events I trimmed my numbers a little
bit," said Ragen Mackenzie analyst Jonathan Geurkink. "But I've heard
different things, too, since bringing my numbers down. I've heard some of their
license revenues may be a little stronger," Geurkink said.

Keeping the lights on

Microsoft earlier this year announced a new licensing program under which
corporations and institutions buy bulk copies of software like its Windows
operating system and Office set of productivity applications.

Originally, the changes, which will effectively raise prices for some
customers, required signing new licenses by October to avoid facing even higher
costs. Microsoft later extended that deadline to next July, but many customers
had already met the original October target, resulting in a modest boost to
revenues for the quarter, analysts said.

"There is just general weaker spending on both the consumer and
corporate side, but I think they have a lot of license deals," Geurkink
said. "I think that did prompt some people along." Regardless of the
licensing effect, Microsoft sales are usually steady anyway, since many
corporate plans to upgrade to fundamental products like Windows 2000 are set in
motion months in advance.

"They were already better insulated than a lot of the (other software)
players," said Prudential Securities analyst John McPeake. "Most of it
is 'keep the lights on' technology, people are buying it to do basic business
functions."

Also a factor is Microsoft's conservative guidance, which estimated revenues
would grow just 4 percent from the same period last year, to between $6 billion
and $6.2 billion. In July, Microsoft Chief Financial Officer John Connors
estimated fiscal year revenue would be between $28.8 billion and $29.5 billion,
and earnings per share would come in between $1.91 and $1.95.

XP and Xbox

But Connors of course had no inkling of the shock the US economy would sustain
after Sept. 11, saying in July, "This guidance is based on an economy that
doesn't necessarily improve rapidly, but also one that doesn't significantly
deteriorate."

Of particular interest will be the company's expectations for Windows XP,
which will launch on Oct. 25, and the Xbox, now scheduled for a Nov. 15 debut.
With PC sales in the gutter, hopes are dim that Windows XP will make a huge
splash with consumers or businesses, despite widespread praise for the product
as the best operating system Microsoft has ever built.

"It's safe to say everyone has a PC and no one's going to buy XP. PCs
have been a crappy business even before the economy slowed down, even before
9/11," Prudential's McPeake said.

A strong Xbox kickoff, however, still seems in the cards as video games
remain one of the few strong areas of the consumer and high-tech economies,
analysts said.

The $300 machine is expected to sell between 1 million and 1.5 million units
by the end of the year. However, Microsoft is taking a loss on each console
sold, hoping to make money instead on the games, which will cost about $50 each.