[RealMoney.com] Microsoft Warns

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From: Linda (joelinda1@home.com)
Date: Thu Dec 14 2000 - 19:00:27 PST

[Ugh. After hours tonight, Microsoft warned for the second quarter,
it's first earnings warning since March 1989. Nasdaq futures have
tanked. Microsoft also lowered its revenue and earnings guidance for
the current fiscal year. The company now expects fiscal 2001 revenues
of $25.2 billion to $25.4 billion - that is *1 billion* less than
analyst expectations.



Tough Questions for Microsoft After Joining the Warning Club
By Adam Lashinsky
Silicon Valley Columnist
12/14/00 7:40 PM ET

The most salient question from a Wall Street analyst during
Microsoft's (MSFT:Nasdaq - news - boards) hastily arranged
teleconference Thursday afternoon came from William Epifanio, the
New York-based software analyst for J.P. Morgan.

If you're only now beginning to see a worldwide economic slowdown,
and if so far your downward financial revisions are based mostly on
weakness in desktop applications (software programs corporations buy
for their PCs) and consumer businesses (like the MSN Internet
service), isn't it likely there are more downward revisions to come?

"This is our best effort and our best forecast for the moment," said
a suddenly subdued John Connors, who never got his honeymoon period as
Microsoft's CFO, having risen to the post a year ago. "It's hard to
predict the extent of the economic slowdown."

Translation: We all knew things were bad after warning or
disappointments (or both) from the likes of Intel
(INTC:Nasdaq - news - boards), Compaq (CPQ:NYSE - news - boards),
Gateway (GTW:NYSE - news - boards), Apple (AAPL:Nasdaq - news - boards),
Dell (DELL:Nasdaq - news - boards) and others. Now we've found out
there's something we don't know: how bad it's going to get.

To repeat, Microsoft blamed its earnings and revenue shortfall on two
segments, desktop applications and consumer products. The desktop
applications part was weird because Microsoft didn't flag its desktop
"platform" sales, which are twice as big as applications. One would
think they'd go hand-in-hand, but the applications slowdown
specifically speaks to the weakness in corporate spending because
consumers typically just take what comes with the package.

Oracle (ORCL:Nasdaq - news - boards) offered a conflicting picture on
corporate spending by reporting a blowout quarter simultaneously with
Microsoft's warning. But Mr. Softee (how apt the moniker suddenly seems)
is a better gauge on the overall economy than Oracle. The former sells
to absolutely everyone; the latter focuses on bigger companies that can
afford its big-ticket software.

Regarding its consumer segment, Microsoft gave no supporting data, but
said it is experiencing weakness in subscription and online advertising
sales in its consumer unit, largely made up of its MSN Internet
Microsoft's consumer software, services and devices business is a
relative pimple for the software giant. Its revenues were $479 million
in the September quarter, about 8% of the total. But it's an
unprofitable pimple for Microsoft, and everyone from America Online
(AOL:NYSE - news - boards) (and its soon-to-be-acquired magazine
properties) to Yahoo! (YHOO:Nasdaq - news - boards) and the dead-tree
media companies (we can still call them that) should be very afraid
when Microsoft's aggressive sales force can't push ads due to the
general economic climate.

There's more evidence the Microsoft shortfall gets worse before it
gets better. Microsoft held steady on its guidance that it will record
$800 million in investment and interest gains for the December quarter.
And Connors points out that interest and other income accounts for most
of the gains, meaning that Microsoft isn't relying on stock-market
killings to make this number. But this becomes a flimsier and flimsier
proposition. Microsoft's investment and interest income has increased
from $703 million in fiscal 1998 to $1.8 billion in 1999 and
$3.2 billion in 2000. What are the odds the software company can't
top that figure this fiscal year?

A word on valuation. At Microsoft's new earnings forecast of $1.80 to
$1.82 per share for the fiscal year ending in June 2001 -- down from
the former consensus of $1.90 -- the company's shares are worth about
30 times forward earnings. That for a company with 6% projected
year-over-year earnings growth.


Finally, where are Steve Ballmer and Bill Gates? Microsoft's CFO is
qualified to answer questions, but I wonder if the company realizes
that with the investing public listening in on its accessible Webcasts,
the public would like to be reassured by the CEO or the chairman,
two of the most visible faces of this company.

 Because as it stands, Microsoft's not reassuring anyone.

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