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Microsoft tanks on growth, antitrust concerns

Shares of Microsoft (Nasdaq: MSFT) were hammered Monday as investors were hit by a double whammy -- slow growth prospects and a possible break-up.

In early trading, Microsoft was down 12 7/16 to 66 1/2, or nearly 16 percent.

Although a potential Microsoft break-up was the latest news, it wasn't the most important to investors.

It is widely expected that the Justice Department will recommend that Microsoft be broken up as the company's long-running antitrust battle continues with the government. The only debate seems to be just how the government would break up Microsoft.

Wall Street had put aside antitrust concerns as long as Microsoft could deliver great financials.

But Microsoft didn't deliver this time. After the closing bell on Thursday, Microsoft reported sluggish sales growth in its third quarter and issued a gloomy outlook. The markets were closed Friday for Good Friday so this is the first time Wall Street could react to the results.

And analysts weren't pleased. Rick Sherlund of Goldman Sachs cut his rating on Microsoft to "market outperform" from "buy," and the brokerage removed the software giant from its "recommended for purchase" list.

In a note entitled ``Microsoft hits a wall for the first time,'' SG Cowen analyst Drew Brosseau cut his earnings outlook for fiscal 2000 and 2001. He also cut his rating on Microsoft to ``buy'' from ``strong buy,'' citing disappointing third-quarter revenue and operating earnings growth.

The software giant used investment income to pad earnings of 43 cents a share in its fiscal third quarter and missed revenue targets with sales of $5.66 billion.

Analysts expected a so-so quarter, but were hoping for a strong calendar second half surge due to Windows 2000 sales.

CFO John Connors said during a conference call Thursday that the company's fourth quarter earnings could be a "penny or two" short of the 43 cents a share consensus.

Microsoft also took its customary caution a bit farther. 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.

"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 businesses ... It's (still) a lot of revenue (growth), even in the mid-teens."

"Maturation in core PC business looks to offset positive momentum from Windows 2000 product cycle,'' said Brosseau, referring to Microsoft's next-generation software platform.

"We've cut our revenue and earnings projections to reflect more modest growth assumptions of 15-20 percent over the next couple of years,'' Brosseau said.

Reuters contributed to this report.
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