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Microsoft Lowers Profit Estimates

Computers: Software giant cites slower sales, but says long-term outlook is good. Shares fall 6% after the news.


SEATTLE — Microsoft Corp. warned Thursday that its second-quarter revenue and profit will be 5% to 6% lower than previous estimates because of a worldwide slowdown in computer sales. Shares initially fell 6% in after-hours trading on the news.

"It's always important to note that it's not like the business is shrinking," said industry analyst Dwight Davis of Summit Strategies in Kirkland, Wash. "It's just that the growth rates aren't as high as they had hoped."

He noted that Microsoft "has a history of low-balling their estimates and then coming out and doing better than expectations." But he said it was relatively rare for the software company to readjust downward midway through a quarter.

Revenue for the quarter ending Dec. 31 is now expected to be $6.4 billion to $6.5 billion, with earnings per share of 46 cents or 47 cents, Microsoft said.

Analysts surveyed by First Call/Thomson Financial were expecting earnings of 49 cents.

For the fiscal year ending in June, Microsoft now expects revenue of $25.2 billion to $25.4 billion, about 5% lower than predicted. Earnings per share will be about $1.80 to $1.82; analysts were expecting $1.91.

"We believe, like many other technology companies, that the current weakness in worldwide economic conditions is resulting in a slowdown in PC sales, corporate IT spending and consumer online services and advertising," said John Connors, Microsoft's chief financial officer.

"However, while our short-term results will continue to be affected by the current economic environment, our long-term outlook on the information-technology market and the PC industry remains positive."

Microsoft shares closed off $1.75 at $55.50 on Nasdaq, but fell $3.25 to $52.25 in after-hours trading after the warning.

In a conference call with analysts, Connors said the reduced expectations were more heavily weighted to desktop applications than platforms.

He was referring to software such as Office, the company's flagship business software, which --like Windows--is often installed in PCs before they are sold. A fairly good percentage of PCs sold at retail end up in businesses, Connors noted--especially small to mid-size businesses.

"The PC is far from dead," Connors said, adding that the industry "shouldn't expect the kind of growth we had when it was growing from a smaller base."

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