Microsoft Earnings Come Up Short

Revenues for Microsoft Corp.’s first quarter fiscal 2002 came in solid Thursday — higher than many analysts had predicted — but
that failed to translate into earnings, as investment losses caused the company to report earnings per share 15 cents below what
analysts were expecting.

The Redmond, Wash.-based software titan reported EPS of 23 cents — net profit of $1.28 billion — far below analysts’ forecasts of
38 to 42 cents a share, according to Thomson Financial/First Call. Much of the shortfall was attributed to $1.2 billion in
investment losses.

Analysts usually disregard non-operating items like investment results when forecasting earnings. However, as Goldman Sachs & Co.
analyst Rick Sherlund has noted, those numbers have been included because last year’s results included gains due to investments and
there is a desire to be consistent.

On the upside, Microsoft said customer demand for Windows 2000 and .NET Enterprise Server remain strong. The
company said the Windows 2000 Server family saw sales growth of more than 20 percent and the .NET Enterprise Server family saw sales
growth of more than 30 percent.

“We were especially thrilled to see strong customer demand for Windows 2000 Advanced Server, which sold twice as many units as it
did the previous year,” said Brian Valentine, senior vice president for the Windows division at Microsoft.

But even as analysts and investors digest Microsoft’s third quarter results, many are already turning their eyes to the December
quarter, which will reflect the launch of Microsoft’s much touted Windows XP operating system and the Xbox game console. GS’
Sherlund has also noted that unlike many software vendors, Microsoft’s revenues are not back-end loaded to the end of its quarter,
meaning the effects of Sept. 11 will be reflected in the December quarter, not the current quarter.

“While we are looking forward to the upcoming launches of Windows XP, Xbox and MSN 7, we also recognize that this is a period of
unprecedented global uncertainty that could have an impact on the economy and our business,” Microsoft Chief Financial Officer John
Connors warned Thursday.

The company advised that it expects revenue for its second quarter to be in the $7.1 billion to $7.3 billion range, which is in line
with Sherlund’s prediction of $7.25 billion, made Tuesday. However, there was more divergence in diluted earnings per share.
Microsoft’s guidance suggested December EPS is expected to be between 49 cents and 50 cents. On Tuesday, Sherlund predicted that
December EPS would be about 55 cents, though he noted
that figure reflected 10 cents of positive EPS impact from the expected sale of Expedia to USA Networks. Expedia’s share price has
dropped significantly since Sept. 11.

“Microsoft expects the deal to close in the December quarter, although we expect that EPS gains in the quarter will be several cents
lower given that shares of Expedia are off significantly since the deal was announced in July,” Sherlund said.

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