March 22, 2001 7:55 AM PST

Goldman cuts Microsoft estimates

Goldman Sachs analyst Rick Sherlund lowered estimates Thursday for Microsoft?s fiscal third quarter, adding that the warnings from PC companies about slowing growth will have to affect the software giant.

Investors may want to take note because the last time Sherlund dropped his estimates the software giant missed its quarter.

Sherlund said in a research note Thursday that he doubts Microsoft will pre-announce results, since he expects it to report revenue of around $6 billion, at the low end of analysts? expectations. According to First Call consensus, Wall Street analysts expect the company to post earnings of 42 cents per share, and revenue of $6.19 billion.

Microsoft is scheduled to report results for the quarter on April 19. Earlier this week, Bank of America initiated coverage of Microsoft with a "market performer" rating, with analyst Greg Vogel noting that revenue and earnings growth has slowed in recent quarters because of "factors that are likely to remain in place for the near-term." Those include market saturation, a shift to a server-centric computing model and continued weakness in IT spending resulting in slower PC unit growth.

Sherlund said he now expects revenue for the quarter at $6 billion to $6.1 billion and earnings of 41 cents per share. He lowered 2001 earnings estimates to $1.75 per share from $1.78, and 2002 estimates to $1.75 per share from $1.86.

But he noted that since many investors are expecting a profit warning from the company, the news may already be reflected in the stock price. Microsoft closed at $50.06 Wednesday, down 15 percent from the beginning of the month.

"We had previously modeled a 5 percent sequential decline in revenues for Microsoft and based on PC industry pre-announcements now anticipate about a 10 percent sequential decline," Sherlund wrote. Companies including Compaq Computer, Dell Computer and Hewlett-Packard have issued warnings for their upcoming quarters.

Merrill Lynch recently lowered its prediction for PC unit growth to 12.5 percent from 15.4 percent. And research firm IDC put U.S. PC growth in the fourth quarter at 0.3 percent year over year, down 3.6 percent from a quarter earlier.

But looking forward, Sherlund said there may be some chances for good news for Microsoft, including a potentially more favorable resolution of the antitrust case, the planned June launch of Office XP and the planned December launch of Windows XP, a new operating system aimed at the consumer market.

"We believe Windows XP could stimulate stronger consumer upgrade demand and would anticipate stronger corporate demand in calendar 2002 given that it will have been about two years since the corporate market upgraded desktop computers," Sherlund wrote. "Longer-term, we believe the company's .NET initiative will be important in repositioning the company for stronger growth beyond the more mature PC market, but this may take several years to materialize."

 

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