Microsoft issues earnings warning

Microsoft Thursday became the latest victim of the PC industry slowdown, as the company issued a revenue and earnings warning for its second fiscal quarter. The software giant said it expects the upcoming financial results to be well below expectations for the quarter and its overall fiscal year.

"We are seeing a slowdown in global economic conditions, particularly in the U.S.," Microsoft Chief Financial Officer John Connors said in a call with press and analysts following the warning. "We are seeing an accelerated slowing of PC sales as the quarter progresses. Accordingly, we are adjusting our revenue and earnings expectations for the current quarter and for the balance of the fiscal year."

With the stock markets heading south, many PC-centric vendors were forced to revise their estimates over the last two weeks. Intel, Gateway, Apple, Compaq and others all lowered their expectations for upcoming quarters.

For its second fiscal quarter ending Dec. 31, Microsoft expects revenue in the range of $6.4 billion to $6.5 billion. These figures translate to between 46 cents and 47 cents per share in diluted earnings. Analysts polled at First Call/Thomson Financial predicted the software maker would make 49 cents per share for the quarter.

Connors added Microsoft expects to earn between $1.80 and $1.82 per share in diluted earnings for the entire fiscal year - well below First Call's forecast of $1.91 per share.

The vendor's consumer line of products declined more sharply over the quarter than did its corporate products, Connors said. He was, however, quick to warn that Microsoft would not go into too much detail about the shortcomings until its earnings announcement on Jan. 18, 2001.

"Overall, our enterprise business does not appear to be impacted to the same degree as our consumer and desktop segments," he said. "We will give you more information and guidance in January, regarding results in the differing segments."

Along with many analysts, Microsoft viewed the slowdown in the economy as a cyclical one. Connors pointed to the upcoming releases of the Whistler operating system and Office 10 as two possible drivers of stronger revenue in the year ahead. In addition, the Windows 2000 Server line continues to gain momentum as corporate customers shift from trials to adoption, Connors said.

Microsoft also looks forward to the release of its Xbox gaming console, wireless products and software applications for small-office users.

"It is hard to predict the extent of the economic slowdown," Connors said. "The economy will likely face some transitions, but we are enthusiastic about the opportunities for Microsoft."

Connors denied charges of the PC's decline, saying desktops and laptops will play a central role in the years ahead.

Connors also appeared consistent with analysts when pointing out that technology is likely to make up an ever-increasing amount of national and global spending in the next 3 to 5 years - one reason robust economic conditions in the sector may return.