[eccr] Hints of Woe as Microsoft Posts Gains (NYT)

Title: Hints of Woe as Microsoft Posts Gains (NYT)

April 19, 2002

Hints of Woe as Microsoft Posts Gains

By JOHN MARKOFF (NYT)

AN FRANCISCO, April 18 ‹ Microsoft, the world's largest software publisher, delivered what it said were strong PC software results today combined with weaker corporate sales for its third fiscal quarter in 2002, suggesting that the company is being held back by the stagnant economy.

Microsoft also scaled back its projections for the fourth quarter of the fiscal year 2002 and for its 2003 fiscal year. The pessimistic guidance indicated that like the world's largest computer maker, I.B.M., which reported disappointing first-quarter results on Wednesday, Microsoft is having trouble escaping a dismal corporate business environment.

Even in sales of its new Windows XP operating system, where the company said it had displayed unusual strength, several analysts suggested that the improvements might be credited in part to changes in accounting practices that altered the point at which the company recognizes revenue.

Sales of Microsoft's operating systems to computer makers were up 15 percent from a year ago, said Sanjiv G. Hingorani, a financial analyst at Dresdner Kleinwort Wasserstein, adding, "PC shipments weren't up that much, I can assure you."

Microsoft's chief financial officer, John G. Connors, disputed the criticism, saying that accounting changes were not reflected in the Windows XP sales numbers in the third quarter. The company said the shift to XP was remarkable within the personal computer industry: during the quarter, Windows XP shipped on almost 60 percent of all PC's, representing the fastest growth rate of any of Microsoft's operating systems to date.

Microsoft also indicated in several ways during the day that sales of its much-promoted Xbox game machine had been more disappointing than previously known. This morning, before its earnings report was released, the company announced that it was significantly cutting the price of the Xbox player in Europe and Australia, where the product has not been doing well.

In the company's conference call with analysts this afternoon, Mr. Connors said Microsoft was scaling back its projection of Xbox sales this year to 3.5 millin to 4 million units, from 4.5 million to 6 million units. The company said it was also particularly disappointed with the sales of Xbox in Japan, but insisted that it would take a long-term orientation to that market.

Microsoft, which is based in Redmond, Wash., said its revenue reached $7.25 billion for its third quarter ended March 31, up 13 percent from $6.4 billion for the quarter last year. Net income for the quarter was $2.74 billion, or 49 cents a share, a total that included an $847 million after-tax gain on the sale of its Expedia travel Web site and an $806 million after-tax charge related to "investment impairments."

The per-share figure fell short of analysts' forecasts of 51 cents as reported by Thomson Financial/First Call. But the company attributed the shortfall to lower-than-expected gains from the sale of its Expedia business and larger-than-expected costs associated with its investment in AT&T's broadband cable business. Microsoft said it had taken a charge of $1.2 billion for the quarter related to the AT&T investment and a total of $3 billion in charges for the year to date.

In terms of operating income, the company said it had actually had an excellent quarter, outperforming its guidance by 6 cents a share.

"The PC market was a little better than we expected," Mr. Connors said, noting that that improvement was offset by softness in corporate information technology spending.

Microsoft shares dropped as low as $51.79 in after-hours trading. Earlier, before the release of the earnings report, they fell 26 cents, to $56.37, in regular trading. The stock has declined 15 percent in the last year. But analysts said that PC software sales, which continue to be the heart of Microsoft's business, remained strong.

"From operations, they beat the Street number nicely," said Richard G. Sherlund, an analyst at Goldman Sachs.

Much of the company's efforts in its conference call this afternoon were focused on convincing analysts that good news would await a return of corporate profits and counseling them to prepare for lower profits in 2003, when the company plans to make "big bets" in new businesses.

"Definitely in the verbiage they've been citing the corporate spending environment as being very muted," said Chris Shilakes, a Merrill Lynch analyst.

The best hope for a strong Microsoft recovery would be a resurgence of the PC marketplace, which has contracted in each of the last four quarters around the world. Mr. Connors said he thought growth in the PC market could reach the "low single digits" next year.

Microsoft executives also stressed that the revenue numbers were more difficult to gauge because corporate customers were increasingly shifting from buying to licensing software. In that case revenue is recognized on a deferred basis.

Some analysts continue to say that the company's sales of software for businesses' information technology operations remain weak.

"Their enterprise software sales were down sequentially from last quarter," said David Readerman, a partner at Thomas Weisel Partners. "You square that with Intel talking about the strength on their server side, and it's obvious the heart of Microsoft's I.T. business is weak."

Source: http://www.nytimes.com/2002/04/19/technology/19MICR.html?todaysheadlines