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The Honolulu Advertiser

Posted on: Friday, October 24, 2003

Microsoft sales slow on security concerns

By Joseph Menn
Los Angeles Times

Microsoft Corp. said yesterday its quarterly sales rose at the slowest pace in more than three years while new contract signings slipped more than expected because of concerns about the security of Windows products.

Revenue in its fiscal first quarter ended Sept. 30 grew 6.1 percent to $8.22 billion from $7.75 billion a year earlier, the smallest percentage increase since the last quarter of fiscal 2000.

Profit declined to $2.61 billion, or 24 cents a share, from $2.73 billion, or 25 cents, because the company started counting stock-option grants as an expense. Microsoft yesterday adjusted the year-ago results to reflect the accounting change for option grants, unofficially reducing that quarter's net income to $2.04 billion, or 19 cents a share.

The slowdown in sales had been anticipated. Microsoft shifted many of its large customers to multiyear licensing agreements last year, generating a temporary bulge in revenue.

Analysts were more concerned that new multiyear licensing agreements — a key indicator of future revenue — weren't being signed as quickly as Microsoft had anticipated. The telltale sign was a drop in the amount of licensing business that was booked, from more than $9 billion in its fiscal fourth quarter to $8.25 billion in the most recent quarter.

Drew Brosseau, an SG Cowen Securities analyst, had expected the figure to come in around $8.7 billion.

"We're trying to figure out whether it's an anomaly. We're not sure," said Brosseau, who owns no Microsoft shares and whose firm does no banking business with the Redmond, Wash.-based company.

If it continues, the slowdown in new licensing deals probably will reduce Microsoft's annual revenue by $1 billion and its full-year profit by 3 cents a share, said Rick Sherlund, an analyst with Goldman Sachs, which does business with the company.

"Basically, they're eliminating the upside from the economic recovery," he said.

Shares of Microsoft, the world's most valuable company, dropped nearly 5 percent to $27.54 in after-hours trading. They had risen 2 cents to $28.91 in regular Nasdaq trading before the results were released.

Microsoft executives said technology sales to corporations were hurt by the summer's outbreak of Internet worms and viruses designed to attack machines running Microsoft's dominant Windows operating system.

Those security issues "diverted the focus of our customers, the sales force and the (distribution) channel away from closing deals," said Chief Financial Officer John Connors.

But because Microsoft expects PC sales to consumers to continue their recent improvement, it raised its forecasts for the remainder of fiscal 2004. The company now expects revenue of $34.8 billion to $35.3 billion and profit of 86 cents to 88 cents a share. In July, it estimated full-year sales of $34.2 billion to $34.9 billion.

Microsoft executives said the company's Internet service, MSN, turned its first profit during the quarter despite a drop in the number of subscribers. Microsoft said advertising revenue grew 50 percent but wouldn't reveal the size of the profit.