Analysts Expect Microsoft to Warn on Q2 Revenue

Microsoft may have to warn Wall Street that it will fall short of its expectations for its fiscal 2009 second quarter because of the flagging PC market, according to financial analysts who follow the company.

Several analysts, including Morgan Stanley's Adam Holt, expect that Microsoft could preannounce negative earnings before it reveals its second-quarter financials on Jan. 22, 2009, something it has not done since 2000. The company would be another victim of the current economic recession in the U.S., which has negatively affected the PC market on which Microsoft's key business segments depend. Microsoft's second quarter ends Dec. 31.

In a research note released Thursday, Holt wrote that Morgan Stanley is lowering its estimates for Microsoft's second-quarter financials to revenue of US$16.7 billion and earnings per share (EPS) of $0.46 from revenue of $17.3 billion and EPS of $0.51. These numbers are lower than Microsoft's current expectations for the quarter, which the company already had reduced when it revealed first-quarter financials on Oct. 23.

Microsoft said in October that it expects second-quarter revenue in the range of $17.3 billion to $17.8 billion and EPS in the range of $0.51 to $0.53. Previously, the company said it expected about $18 billion in revenue with EPS of $0.55 for that quarter.

"Microsoft hasn't negatively preannounced since December '00," Holt wrote in the note. "However, business conditions have deteriorated since Microsoft guided in October and we believe the company could come up short of its FQ2 targets."

Morgan Stanley also is lowering Microsoft's full fiscal 2009 results from revenue of $64.4 billion and EPS of $2.02 to revenue of $62.2 billion and EPS of $1.84, numbers that represent revenue that is slightly off Microsoft's current mark for the year. Microsoft expects revenue in the range of $64.9 billion to $66.4 billion and EPS in the range of $2 to $2.10 for the year. The company also reduced these estimates in October from revenue in the range of $66.59 billion to $67.1 billion, and EPS in the range of $2.11 and $2.18.

Morgan Stanley also Thursday lowered full-year 2009 estimates for key areas of Microsoft's business -- its Windows client, server and tools, and business division segments, which together represent 85 percent of the company's revenue.

The analyst firm is lowering estimates for Microsoft's client business from $16.3 billion to $15.8 billion based on flat PC unit sales, according to Holt. It is lowering estimates for server and tools to $14.7 billion from $15.2 billion, and Business Division revenue to $20.4 billion from $21.3 billion.

Holt noted that Microsoft is on the downslope of an important product cycle, Office 2007, which is why he expects revenue in the Business Division to decelerate in 2009. Microsoft released the product at the end of 2007, and analysts believe its adoption already has peaked.

Moreover, business adoption of both Office 2007 and Windows Vista is below expectations, another factor that could have a negative effect on Microsoft's financials, Holt wrote.

However, if business adoption of both of those products goes better than expected in 2009, Microsoft could meet its current expectations if worldwide PC growth exceeds current expectations, he noted.

"The downside risk to our estimates comes from slowdown in spending having a negative impact on PC sales or business IT spending," he wrote.

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