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Microsoft stumbles; analysts maintain ratings

    Microsoft (Nasdaq: MSFT) fell Friday after the company issued a rare profit warning amid a slowdown in the PC sector.

    Shares were off 9 percent even though many analysts said Microsoft's warning wasn't a surprise in the wake of warnings from PC vendors and Intel (Nasdaq: INTC).

    Analysts maintained their ratings and lowered estimates across the board. All cited a belief that the company's server software is still doing well and saw hope in the enterprise side of business.

    Microsoft pre-announced a second quarter revenue and earnings shortfall after Thursday's closing bell. The company said sales of desktop applications were impacted by moderated consumer and IT spending. Microsoft also said that through 2001, it sees 10 percent PC unit growth as opposed to the low to mid-teens growth rate expected earlier this year.

    Analyst Christopher C. Shilakes at Merrill Lynch held his "accumulate" rating, along with a "long term buy," but reduced his target price to $61. He also changed a risk rating to "above average risk" from "low risk."

    Revenue estimates for the second quarter were dropped to $6.5 billion from $6.8 billion and earnings estimates to 46 cents a share from 49 cents a share. For fiscal 2001, Shilakes dropped revenues to $25.3 billion to $26.6 billion and earnings to $1.82 a share from $1.90 a share.

    He said the shortfall was "widely anticipated" and doesn't expect a sharp sell off.

    Shilakes said Microsoft's vulnerability to the PC market suggests that its continued success depends on its ability to "transition from a desktop software company to an enterprise solution vendor."

    He remains "cautiously optimistic... as the company slowly transitions from its reliance on desktop software and continues to roll out its higher growth, server side software."

    "We believe it is important for investors to note that Microsoft cited weakness primarily in desktops, and that its server and enterprise business is healthy," Shilakes added.

    Christopher W. Mortenson at Deutsche Banc Alex. Brown maintained his "buy" rating and also lowered estimates for the rest of the fiscal year, in line with Microsoft's guidance.

    "While we are disappointed with this news, it was perhaps somewhat inevitable given that virtually everyone else in the PC food chain had already preannounced," Mortensen said in a research note.

    Mortensen said details are still limited, but it "appears that the main shortfall is in desktop applications, followed by the consumer Internet business."

    "We continue to believe that the Windows 2000 upgrade cycle will be solid and gain increasing momentum in calendar ༽ especially as it relates to server platforms and applications," Mortensen noted.

    Chase H&Q analyst Chris Galvin, who had already revised estimates downwards last week in the wake of warnings from PC makers and Intel, also maintained a "buy" while lowering estimates again.

    He noted that "Microsoft was able to adjust operating expenses to cushion the impact to the bottom line," and "gave minimal guidance on which business lines will be most affected, but deferred commentary to the company's regularly scheduled conference call on January 18th."

    Lehman Brothers analyst Michael Stanek likewise reiterated a "buy" and lowered estimates for a second time this month.

    "Overall we believe that MSFT`s strategic and competitive positioning remains compelling, though we believe the stock may trade near its historical valuation lows of 25 (times)," or $45.25, Stanek stated in a research note.

    "Microsoft is still an extremely well positioned company, though we expect that investors will sit on the sidelines," Stanek concluded.


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