Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks), the world's largest software maker, Thursday beat earnings and revenue expectations for its third quarter, ending March 31. The company also trimmed earnings forecasts for the fourth quarter and next year.
The Redmond, Wash.-based software giant reported third-quarter earnings of $2.45 billion, or 44 cents per share, on revenue of $6.46 billion. Analysts were expecting earnings of 42 cents on revenue of $6.22 billion, according to
Multex.com. A year ago, the company earned 43 cents on $5.7 billion in revenue.
Making its numbers put Microsoft in sharp contrast to a number of its fellow tech giants this quarter and likely will inject more cheer into the market. Whether that cheer is justified, in light of Microsoft's actual performance and its vision of coming quarters, remains a question mark.
After rising $2.59, or 4%, to $68.02 during the regular session, Microsoft shares sold off slightly to $67.94 in after-hours trading on
Island.
The company said revenue for its June quarter would be $6.3 billion to $6.5 billion, with earnings in the range of 41 cents to 42 cents. Analysts currently expect revenue of $6.3 billion and earnings of 43 cents per share.
For the fiscal year ending in June 2002, the company said it expects revenue of $28 billion to $29 billion, in line with the $28.1 billion analysts are expecting. Earnings for the year should be $1.90 to $1.91 per share, below the $1.96 currently expected.
But beating expectations, in Microsoft's case, is a matter of perspective. At the beginning of the year, analysts were forecasting that the company would earn 44 cents per share for the quarter. But Wall Street brought that number down because of mounting evidence of slowing PC sales.
"Part of the reason there was upside was because we all preannounced for them," says Andrew Brosseau, an analyst at
SG Cowen Securities who rates Microsoft a neutral. "If we hadn't all brought our numbers down, then basically, the results would have been in line." (His firm hasn't done underwriting for the company.)
In January, the technology giant forecast earnings of 42 cents to 43 cents a share on revenue of $6.3 billion to $6.4 billion. But in a statement Thursday, it said numbers were slightly better than expected due to strong demand for its Windows 2000 Professional software, as well as increased demand for its business-focused software products.
The company said its higher-priced Windows 2000 Professional edition accounted for 35% of its desktop operating system shipments. Of course, that shouldn't be too surprising, given that the Windows 2000 product is now more than a year old and has had time to be pushed into the selling channel.
But during the quarter, analysts became increasingly concerned about sales of the company's desktop software that ships on PCs. Indeed, Microsoft CFO John Connors said that PC software shipments worldwide would grow just 7% to 8% for fiscal 2001, which ends at the end of June. That's lower than the initial "low double digit" growth rate the company expected. And going forward into fiscal 2002, Connors said he expects much of the same.
"Given where the March quarter came out for PC shipments, and where the U.S. economy is today, it probably wouldn't be prudent to forecast growth rates higher than where we are today," Connors said. He said the company's outlook for fiscal 2002 is based on "an economy that doesn't improve quickly, but also one that doesn't significantly deteriorate."
Many observers feel that Microsoft's glory days are behind it, as the PC is being replaced by other kinds of computing devices, from cell phones to electronic organizers.
"With regard to PC unit growth, their assumptions are probably right," SG Cowen's Brosseau says. "But the question to ask is whether those growth rates will ever be different again."
Microsoft also was able to beat the current estimates, it said, because of better-than-expected sales into organizations -- that's businesses to you and me -- of its desktop applications software. That data point is somewhat surprising, given the conventional thinking that currently reigns on Wall Street.
The personal productivity software that Microsoft builds -- like its bundled
Office suite -- has taken a back seat, in terms of priority, to more complex company-wide computer programs that can help entire firms run more efficiently and are sold by the likes of
Oracle(ORCL Quote - Cramer on ORCL - Stock Picks) and
SAP(SAP Quote - Cramer on SAP - Stock Picks).
Against that backdrop, it's hard to make a case to buy programs like
Office XP right now, the next edition of Office that the company says will be broadly available on May 31. After all, besides making that annoying little
Clippy sweat, what more can the company's software do? Analysts don't expect the company to see meaningful revenue from it until 2002.
"One of their thoughts on the primary source of the upside were sales of desktop applications -- presumably Office 2000 -- that they pushed into organizations," says Brosseau. "But it's not clear they can do that again."
Which is why Microsoft is now concentrating on so many other initiatives outside of the PC sector, such as its much heralded push into the gaming world with the introduction of its
Xbox game system, due out by Christmas. On its conference call, management said that development of the Xbox would likely eat into margins. The plus side is that those investments will be recouped later by game sales.
As its iron-handed grip on the PC world chains it to that sector's slowing growth, it's a move Microsoft has to make.
"If you're in Microsoft's shoes, and you're a $25 billion company, it's not easy to find another big market to go after, because it's clear that their market has gotten mature," says Brosseau. "It will eventually be a significant new source, but it's obviously not as good a source as their existing business."
Joe Bousquin
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