Microsoft Beats Street, Sees Rocky Road Ahead

Microsoft managed to beat expectations for the most recent quarter but said it has concerns about how the rest of this year and the first half of 2004 will shape up as demand for the personal computers and enterprise networks that run its software remains tepid.

The company said sales in the first three months of the year rose 8 percent over last year to US$7.84 billion, while its net profit grew 2 percent to $2.79 billion, enough to beat Wall Street estimates.

“There are no clear indications the demand for PCs or corporate information-technology spending is improving,” Microsoft CFO John Connors said in a conference call, adding that the coming year may in some ways be even more challenging.

Familiar Refrain

Fellow tech bellwether Intel had a similar story for Wall Street on Tuesday. The leading chipmaker said mobile-device sales helped it squeak past expectations, clocking a profit of $915 million on sales of $6.75 billion.

Intel said it has seen some encouraging signs that the tech slump may have bottomed out, though it has not seen signs of a recovery just yet.

“It feels different,” Intel CFO Andy Bryant said in a conference call. “It feels modestly better.”

A Soft Roll

Analysts noted that Redmond, Washington-based Microsoft has developed a reputation for issuing conservative forecasts and then managing to outperform the lowered targets. But the warnings about its 2004 fiscal year, which begins in June, are not a surprise, given that 2003 began with one of the company’s best quarters ever as it changed the way it charges software license holders.

Giga Information Group analyst Rob Enderle told the E-Commerce Times thatalthough Microsoft has continued to drive sales of software in an otherwise bleak tech spending environment and has seen tablet PCs start to take root, the software giant now may be starting to question whether sales of personal computers to consumers will recover anytime this year or early in 2004.

“There’s been a lot of talk about pent-up demand on the enterprise side, but you don’t hear the same thing about consumers,” he said. “It’s probably smart that they hedge their bets on those sales picking up anytime soon.”

Server Sector Up

In the most recent quarter, sales of server software rose 21 percent, helping to pace gains.

Standard & Poor’s analyst Jonathan Rudy said he believes there is potential for software sales growth to rebound late this year, with a possible surge in sales as pent-up demand is fed.

“Demand for PCs remains weak among consumers, and IT spending continues to be constrained,” Rudy told the E-Commerce Times. Meanwhile, he added, enterprises that once focused on straight software buys are increasingly looking at such issues as security, storage and support, helping to split IT budgets into smaller pieces.

Cash King

Microsoft made gains in one other area as well.

It ended the quarter with more cash than when it began and now sits on a stockpile of more than $46 billion, an amount that has helped fuel speculative reports about Microsoft entering the picture in some high-profile takeover scenarios, such as the sale of Universal Music by Vivendi.

The upbeat news helped spark a modest Nasdaq rally early Wednesday. Microsoft shares were up more than 3 percent to $25.49. Intel’s stock rose more than 5 percent to $18.01.

Settlement Reached

Later on Tuesday, Microsoft said it had settled a set of class-action lawsuits brought by consumer groups in the state of Florida. The deal calls for Microsoft to pay up to $202 million to computer users who bought Microsoft software between November 1995 and the end of 2002.

As with earlier settlements, Microsoft agreed to donate half of all unclaimed refunds to the state’s schools in the form of vouchers for computer equipment.