Microsoft Scales Back Forecasts

In a surprise announcement late Thursday afternoon, Microsoft warned that revenue and earnings for its second quarter ending Dec. 31, 2000, would be below the company’s previous expectations.

In a conference call to analysts and investors, CFO John Connors announced that revenue for the second quarter is now expected to be in the range of $6.4 to $6.5 billion, and diluted earnings per share is expected to be $0.46 or $0.47, down five to six percent from prior guidance.

According to Connors, the revised expectations are due to December quarter revenue shortfalls, primarily in the desktop applications revenue and in Microsoft’s consumer business.

The CFO cited this quarter’s softening in PC demand, particularly in the consumer sector, as a major factor. “That trend is beginning to impact our results now and will likely affect us for the balance of this fiscal year,” said Connors.

In the desktop segment, Microsoft’s revised expectations were more heavily weighted towards desktop applications than desktop platforms. According to the CFO, this is a result of an increase in Windows 2000 usage on business PCs, and some slowdown in the rate of license agreements for Microsoft’s desktop apps.

In addition to a slowdown in the company’s desktop platforms, Microsoft’s revenue from MSN and other consumer businesses is likely to be lower than original expectations.

“While overall growth in our consumer business is quite healthy, and we are quite pleased with the progress we are making in many of the metrics published by media metrix and other third parties, subscription revenue growth has not been as fast as we had planned, and advertising revenues across the industry are weaker than expected,” said Connors.

Connors stated that Microsoft’s enterprise business does not appear to be impacted to the same degree as its desktop or consumer business.

The company also announced revised revenue and earnings guidance for the remainder of the current fiscal year. Full-year fiscal 2001 revenue is now expected to be in the range of $25.2 to $25.4 billion, about five percent lower than previous expectations. Diluted earnings per share for fiscal 2001 is expected to be in the range of $1.80 to $1.82.

While the immediate implications of this readjustment will play themselves out on Nasdaq, Connors feels that Microsoft remains in a good position for the future.

“The company will likely face some transitions in the coming months, but we are very enthusiastic about the opportunities ahead for Microsoft. We have a philosophy of investing for the long term and that philosophy has served shareholders well for many years,” said Connors. “Furthermore our financial position and balance sheet leaves us in a very good position for the remainder of this year and many years beyond.”

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