The Giant Stumbles ... Weiss comments

NEW YORK - Microsoft Corp. became the latest casualty of the recent slump in demand for personal computers, as it warned Wall Street its quarterly revenue and earnings would come in below analysts' forecasts.

It was the first profit warning by the Redmond, Wash., software company in more than 10 years, and it indicates the severity of the global economic slowdown that is pinching computer-related companies, analysts said.

The company, whose products are used in most PCs, said revenue for its fiscal second quarter ending Dec. 31 would fall 5% to 6% below expectations, coming in at $6.4 billion to $6.5 billion. As a result, Microsoft expects to post a profit of 46 cents to 47 cents a share, compared with the consensus estimate of 49 cents, according to First Call/Thomson Financial.

Some analysts already had lowered their earnings projections for Microsoft in the wake of recent profit warnings from computer makers such as Gateway Inc. and Compaq Computer Corp., as well as bellwether chip maker Intel Corp.

But analysts had shaved only a penny or so off their earnings estimates for Microsoft, arguing that just a small percentage of the company's sales come from consumers, the market segment thought to be driving the recent sales slowness.

Slump Spreads to Business Demand

Now, Microsoft says the computer-demand slump is spreading to businesses as well, with some companies cutting back on technology spending. What is more, Microsoft's high-priority MSN Internet service is suffering from a wider slowdown in dot-com advertising, and subscriptions aren't increasing as quickly as anticipated, according to the company.

"We believe, like many other technology companies, that the current weakness in world-wide economic conditions is resulting in a slowdown in PC sales, corporate [information technology] spending, and consumer online services and advertising," said Microsoft Chief Financial Officer John Connors. "Accordingly, we are adjusting our revenue and earnings expectations for the current quarter, and for the balance of the fiscal year."

Microsoft's profit warning also is troublesome because the company rarely misses its forecasts. Often, it can use one-time investment gains to meet analysts' expectations, so the announcement could mean the company has seen "enough of a drop [in sales] that they can't smooth it over," Mr. Epifanio said.

A year-end market rally is much anticipated by many bulls, but don't expect it to materialize. Investor confidence is on life support. And Microsoft just pulled the plug.