Analysts Praise Microsoft

Monday, October 22nd 2001, 12:00 am

By: News On 6

SEATTLE (AP) _ Microsoft Corp. may be bruised by a flat personal computer market and massive investment losses, but the company signaled in its latest earnings release that such setbacks will not fell the software giant.

Analysts agreed, predicting that shareholders will flock to Microsoft as other tech companies predict even bigger worries than the Redmond, Wash. software maker.

``I think what's likely to happen is that we'll see Microsoft ... become a safe haven for technology investors,'' said Brendan Barnicle, an analyst with Pacific Crest Securities. ``It's got reliable earnings and it's a company that's not going to blow up even though PC growth has slowed.''

For its fiscal first quarter ended Sept. 30, Microsoft saw earnings drop by 42 percent, but still managed to beat Wall Street's reduced expectations.

It warned, however, that second-quarter and full-year earnings results would fall just shy of analysts' projections.

For the three months ended Sept. 30, Microsoft earned $1.28 billion, or 23 cents per share, compared with $2.21 billion, or 40 cents per share, in the year-ago period.

The results include a hefty $1.24 billion charge, or 20 cents per share, related to investment losses, primarily in telecommunications. Excluding the investment loss, Microsoft earned 43 cents per share.

Analysts polled by Thomson Financial/First Call had forecast earnings of 39 cents a share _ a figure already reduced after the company warned it would not meet analysts' original expectations due to slumping PC sales.

The results were released after the close of trading Thursday. In trading Friday, shares rose $1.15 to close at $57.90 on the Nasdaq Stock Market.

Barnicle said the company's ability to beat core expectations despite the personal computer downturn and massive investment losses was ``a testament to Microsoft's ability to diversity.''

Indeed, the company was helped along this quarter by Microsoft's success in moving into new markets beyond the computer desktop, especially in the server and enterprise areas.

Microsoft's strong performance in the server market was, Barnicle said, the result of its time-tested strategy of putting out a product that isn't quite as good as the competition's but comes at a much lower price.

Revenue for the quarter was 6 percent higher, at $6.13 billion, than revenue of $5.77 billion in the year-ago quarter.

With Microsoft's considerable cash reserve, Barnicle said analysts and investors also wouldn't be bothered by the company's unexpected investment loss.

The loss, combined with a substantial investment loss recorded in the previous quarter, accounts for about 70 percent of the total value of those investments, Chief Financial Officer John Connors said, ``so clearly the majority of the problem is behind us.''

But the company still has plenty of other worries, including its own prediction that PC sales will be flat, or perhaps even decrease by 2 percent, over the company's fiscal year ending in June. That means the company cannot immediately rely on sales of Windows XP, the company's new desktop operating system due out next week.

``We're anticipating that Windows XP will be a very successful product both from a customer satisfaction standpoint and from a financial standpoint _ for the long term,'' Connors said.

Based on that slowdown, Microsoft said second-quarter revenue would come in between $7.1 billion and $7.3 billion _ at the low end of the $7.3 billion expected by analysts. Meanwhile, second-quarter earnings are now expected to come in between 49 and 50 cents per share, Microsoft said, below the 51 cents analysts were predicting.

For the year ended June 30, 2002, Microsoft said earnings will come in between $1.61 and $1.66 per share, with revenue between $28.4 billion and $29.1 billion.

Excluding the investment loss, analysts had been expecting earnings of $1.68 per share on revenue of $28.4 billion.

In the future, the company will bank on its new game console Xbox and its MSN Internet services to help withstand the PC slump. But Connors conceded that neither division will turn a profit immediately.