Microsoft posts lagging 3Q sales, sees slower growth ahead

Microsoft beat the consensus third quarter estimate, but sales missed most analysts' estimates. And the company wants Wall Street to lower its expectations not only for the fourth quarter, but the next fiscal year.

After market close Thursday, the software giant reported fiscal third quarter earnings of $2.39 billion, or 43 cents a share.

First Call consensus expected Microsoft to earn 41 cents a share in the quarter.

But sales of $5.66 billion disappointed many analysts. Company executives said Microsoft was hurt by weak sales of personal computers to business in the wake of concerns about the Y2K computer bug. Business PC sales were slow during January and February and a recovery in March wasn't enough to make up lost revenue.

Analysts should not expect Microsoft to earn more than the current Wall Street consensus expectation of 43 cents per share for the June quarter, CFO John Connors said, during a Thursday afternoon conference call with analysts. The company's fourth quarter earnings could be "penny or two" short of 43 cents, he said.

Connors cited three reasons for fourth quarter wariness:

The slowdown in business PC sales

. "We really want to see it pick up before we get ahead of ourselves," Connors said. "We're hopeful ... but until we see it, we want to be awfully cautious."

Difficult year-over-year comparison.

Microsoft rolled out Office 2000 in the fourth quarter of fiscal 1999, and has no comparable product launch this time.

Waiting for new server products.

Some corporate customers plan to deploy Windows 2000 when Microsoft rolls out some new server applications, but not until then, Connors said. Other customer are waiting for Windows 2000 service pack 1, which is currently scheduled for June, he added.

Microsoft also take the unusual move of extending its customary caution into next fiscal year. The company sees fiscal 2001 revenue growth in the mid-teens, which would be below its growth rate of 20-plus percent in recent years. First Call consensus had been predicting earnings per share of $1.93 for fiscal 2001.

"The consensus estimates (for ༽) that are out there are a little high to me, maybe by as much as a nickel," Connors said.

At $21.9 billion over the last 12 months, Microsoft's revenue is becoming too large to maintain historical growth rates, Connors said.

"If you look at relative growth rate, it's just hard to grow a number that big by 20 percent," he said. "Growing that total revenue number in 20 percent plus kind of ranges is just a heck of a lot of new businesss ... It's (still) a lot of revenue (growth), even in the mid teens."

The $5.66 billion in third quarter sales marks a 23 percent improvement from the year-ago quarter when it pocketed $1.92 billion, or 35 cents a share, on sales of $4.6 billion.

Most analysts were expecting total sales of between $5.75 billion to $5.9 billion.

Retail sales of Windows 2000 were a little higher than the company expected. Still sales though computer makers who install the program directly on new PCs were hurt by weak sales of business computers.

"As we talked to our PC analysts and semiconductor analysts, it became evident just how severely PC demand was affected, primarily in January and February," Richard Sherlund, an analyst at Goldman Sachs, told Reuters. "Although it came back in March, it was too light to make up for the earlier slowdown."

Last quarter, Microsoft earned $2.4 billion, or 47 cents a share, on sales of $6.1 billion.

Its shares have suffered of late, falling from a 52-week high of 119 15/16 in December to below 80 this week.

Twenty-eight of the 31 analysts following the stock maintain either a "buy" or "strong buy" recommendation.

First Call consensus expects it to earn $1.69 a share in the fiscal year.