Reuters Edge

Microsoft seen lowering outlook as economy weighs

SEATTLE (Reuters) - Microsoft Corp MSFT.O is expected to cut its forecasts for the remainder of the year as customers curtail software spending amid the economic downturn.

Microsoft co-founder Bill Gates speaks with former U.S. President Bill Clinton (unseen) during a conversation about philanthropy in New York, September 24, 2008. REUTERS/Chip East

Microsoft's shares have plunged to an eight-year low and its rivals such as SAP AG SAPG.DE have warned of tighter demand.

“Given the current macro-economic situation, I think there is an expectation that it will use this opportunity to bring down guidance a little bit,” said Pat Becker Jr., portfolio manager at Becker Capital Management. Microsoft is the largest holding of the $62 million Becker Value Equity Fund.

Last month, Microsoft Corp MSFT.O Chief Executive Steve Ballmer confirmed what most investors already suspected: the world's largest software maker is not immune to the economic downturn gripping the industry.

Wall Street is already bracing for Microsoft to fall short of expectations in fiscal 2009 or come in at the low-end of the forecast range that it issued in July.

According to Reuters Estimates, analysts on average expect fiscal 2009 earnings of $2.12 per share -- the bottom of Microsoft’s own forecast range of between $2.12 and $2.18 per share. Wall Street sees revenue at $66.7 billion, below the company’s estimated range of $67.3 billion to $68.1 billion.

Microsoft has long pushed the idea that its products make up a small but essential part of corporate technology spending and that its software and its markets are diverse and not overly exposed to any one area.

However, many investors expect the current financial crisis to run longer and cause a deeper economic downturn than any in recent memory.

McAdams Wright Ragen analyst Sid Parakh, who has a “buy” rating on Microsoft, said a spending slowdown could hit personal computer sales, which are closely coupled with revenue at the company’s Windows business.

“Considering the turbulence in the financial markets as well as increased caution over the global economic outlook, we expect customers to pull back on IT spending,” Parakh wrote in a note to clients on Monday.


In the September quarter, worldwide PC shipments remained strong, rising 15 percent from a year ago, driven by demand outside of North America for lower-cost laptops.

Semiconductor giant Intel Corp INTC.O also provided some comfort to technology investors, posting a 12 percent profit rise for the September quarter and beating expectations. It issued a conservative -- but not awful -- outlook.

Resilient PC demand and new product launches from its computer server business bodes well for Microsoft’s earnings from the quarter ended September 30. Analysts expect profit to rise about 3 percent, to 47 cents per share, on an 8 percent rise in revenue to $14.8 billion, according to Reuters Estimates.

Wall Street is forecasting earnings per share of 55 cents in the current quarter on revenue of $18 billion, according to Reuters Estimates.

The December quarter is usually known for being a busy period for Microsoft’s entertainment and devices division as consumers snap up Xbox 360 consoles and video game titles during the holiday shopping season.

The company cut Xbox 360 prices in September, lowering the price of its entry-level console to below $200 -- a key mass-market price level that Microsoft has said historically accounted for more than 75 percent of all machine sales.

“It looks like we are going to have a really difficult holiday season with the U.S. consumer pulling back a lot. So the Xbox business might be weak going forward,” said Morningstar analyst Toan Tran.

Microsoft shares have fallen about 10 percent since the company last reported results on July 17. The stock has fared better than the broader market with the S&P 500 and Nasdaq down more than 20 percent during that period.

Microsoft shares touched an eight-year low at $20.65 on October 10, but it has clawed back to above $24 since then.

Editing by Derek Caney