Analyst Cautions Microsoft May Not Meet Revenue Hopes

A decline in demand for PCs is blamed. But in Redmond, there's no backing off earlier high-teens growth expectations.
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Microsoft (MSFT) - Get Report may not meet revenue expectations this quarter due to drooping PC demand, warns Richard Gardner, a Salomon Smith Barney analyst.

Gardner told clients Tuesday that Microsoft's guidance of 17% to 18% revenue growth from last quarter looks "aggressive," due to softness in the PC sector and higher-than-expected inventories. (Salomon hasn't done recent underwriting for Microsoft, and Gardner rates the company an outperform/high risk.)

Analysts expect the company will post $6.8 billion in revenue this quarter, according to

First Call/Thomson Financial

, up from $5.8 billion in the company's first quarter ended Sept. 30.

In the company's Oct. 18 conference call, Chief Financial Officer John Connor said the company would have sequential revenue growth in the high teens. The company hasn't changed that guidance. It declined to comment Tuesday.

Microsoft's stock fell $3.69, or 5.2%, to $67 a share Tuesday.

Gardner voiced his concerns after releasing a report Tuesday detailing the slowdown in PC sales. "There is very little good news. ... Our most recent checks suggest continued weakness in U.S. consumer and European corporate PC demand and relatively high channel inventories," Gardner wrote.

Even laptops, a favorite on many a Christmas wish list, aren't selling as well as expected. "Even the U.S. retail portable market, which had been growing 30% to 40% year to year between February and July, has cooled to a 20% to 25% growth rate

this month," Gardner wrote.

Gardner also said he hoofed it to several San Francisco-area retailers the day after Thanksgiving and found traffic to be "light."

Goldman Sachs

reportedly defended the software behemoth's stock later Tuesday, saying the quarter isn't at risk. It noted that retail accounts for just 20% to 25% of Microsoft's business, and that corporate demand is doing well. In addition, any demand issue would affect Microsoft in next year's first half, not in this quarter. Goldman analyst

Rick Sherlund

, who follows Microsoft, couldn't be reached to comment. (Goldman hasn't done recent underwriting for the company.)

Meanwhile, the world's largest software company has been trying to put on a happy face. In its annual shareholders meeting on Nov. 9, Microsoft Chief Executive Steve Ballmer told investors, "We have seen some weakness in the PC markets, but we haven't lost any of our unbridled enthusiasm about the software business."