Microsoft CFO Stuns Wall Street

FRAMINGHAM (04/21/2000) - A Microsoft Corp. official, ending an unusually downbeat earnings call, predicted a slowdown in corporate PC spending last night, setting off a chorus of concerns about the impact that might have on the stock market when it reopens for trading on Monday.

In a conference call with reporters and analysts Thursday evening, Microsoft Chief Financial Officer John Connors said lower than expected sales of business PCs dampened the company's third-quarter revenue. Connors also had pessimistic words about ongoing business PC growth, while an analyst interviewed after the call wasn't much more optimistic.

"There is a level of saturation" of the business PC market, said Anne Bui, an analyst at Framingham, Massachusetts-based International Data Corp. (IDC). She pointed out that both IBM Corp. and Gateway 2000 Inc. reported declines in commercial PC sales for their latest quarters.

IDC expects single-digit sequential growth in U.S. commercial PC sales for the rest of the year. However, Bui said she believes Windows 2000 will take off after June and help propel the market in the second half of the year.

During Microsoft's earnings call, Connors delivered an upbeat account of the latest quarter. However, he warned analysts about weak growth in the company's current fourth quarter and in fiscal 2001.

Connors said revenue growth for 2001 would be in the "mid teens," while some analysts had been expecting up to 20 percent growth.

"I was expecting a ho-hum quarter. I was not expecting a lousy quarter," said Bill Epifanio, an analyst at New York-based J. P. Morgan Securities Inc., about the Microsoft results. Combined with Connors' bleak growth outlook for 2001, Microsoft's dampened third-quarter revenue creates a "double whammy" for a stock that is already under a dark cloud because of the U.S. Department of Justice antitrust trial, said Epifanio.

Microsoft has a history of chilling investors' expectations for coming quarters. However, analysts said this approach made little sense when Microsoft's stock is already under pressure. "I think it is to the advantage of Microsoft that the market (is) closed" on Friday, said Jeff Maxick, director of research at Madison Securities Inc. in Chicago.

Analysts said they're worried that Microsoft won't be the only one to suffer.

"Every time Microsoft gets walloped, you can expect collateral damage" to other technology stocks, said Epifanio. "It doesn't look good for the PC vendors either," agreed Maxick.

Microsoft announced revenue and net income both gained 23 percent for its third fiscal quarter. Earnings per share, at 43 cents, were 2 cents above the consensus estimate tallied by First Call Corp. "If you take out the better than expected investment gains, they would have missed their (earnings per share) number," said Maxick.

Microsoft shares fell 3 3/16, or 4 percent, to 75 3/4 in after-hours trading on Thursday. Maxick said he believed Microsoft's stock could sink down to the high 60s on Monday.

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