Microsoft Shares Tumble As Outlook Dims

By Eric Auchard

NEW YORK (Reuters) - Microsoft Corp. (NasdaqNM:MSFT - news) shares fell 16 percent on Monday as several Wall Street analysts downgraded the stock and sources said U.S. authorities would call for the company to be broken in two.

The swoon in Microsoft shares also followed disappointing fiscal third-quarter results, released late on Thursday ahead of the long Easter holiday weekend, and guidance from the company to expect lower growth for the next year.

Microsoft shares were off 12 ^15/16 at 66 on the Nasdaq stock market. U.S. markets were closed on Friday for the Good Friday holiday.

Sources close to the government's antitrust suit against Microsoft said federal regulators favored splitting up the company along product lines, making it spin off its Office software business from its Windows operating system business. Office is a suite of word-processing, spreadsheet and presentation software running on the Windows software system.

Several Wall Street analysts cut their earnings and revenue estimates for Microsoft after the company's chief financial officer guided investors to expect revenue growth of around 15 percent, down from prior forecasts above 20 percent.

``There is an increasing risk that Microsoft might atrophy on the PC (personal computer) platform as IBM did on the mainframe platform, while robust growth shifts to hand-held and wireless devices,'' Goldman Sachs analyst Rick Sherlund said in a research note to clients. He was referring to the technology shift a decade ago that cost IBM its one-time dominance.

Sherlund, considered Wall Street's most influential analyst on the Redmond, Wash.-based software giant, cut his rating on Microsoft shares to ``market outperform'' from ``buy.'' Sherlund helped take the company public in 1987 and his comments on its financial outlook have tremendous sway among investors.

Microsoft Dominates A Maturing, Slower-Growing Pc Market

Microsoft makes the Windows software operating system found on about 80 percent of PCs. Analysts are concerned that the company may be poorly positioned for the next wave of growth from new types of Internet devices such as mobile phones, hand-held computers and interactive televisions.

``It is our view that the corporate market is maturing at a much faster pace than the consumer market, with negative implications for Microsoft's revenue growth,'' Sherlund wrote.

Still, many analysts say Microsoft has a long history of giving conservative guidance on its financial outlook during quarterly reports. These analysts advised investors not to be overly pessimistic on the world's top software company.

For example, ING Barings analyst George Godfrey said, ''Guidance for fiscal 2001 is more cautious than necessary and (we) remain very optimistic on the next 12 months for Microsoft and believe we are reaching absolute bottom in the company's share price, if not there already.''

In a note entitled ``Microsoft hits a wall for the first time,'' SG Cowen analyst Drew Brosseau cut his earnings outlook for the company's fiscal years ending in June 2000 and 2001.

``Maturation in core PC business looks to offset positive momentum from Windows 2000 product cycle,'' he said, referring to Microsoft's next-generation software platform.

``We've cut our revenue and earnings projections to reflect more modest growth assumptions of 15-20 percent over the next couple of years,'' Brosseau said, echoing guidance by Microsoft executives during a conference call with analysts on Thursday.

Quarterly Results Buoyed By Non-Operating Gains

Microsoft said its net profits for the third quarter, ended in March, rose to $2.39 billion, or 43 cents per share, from $1.91 billion, or 35 cents a share, a year earlier.

Revenues rose 23 percent to $5.7 billion.

The earnings surpassed Wall Street estimates by 2 cents per share but included 5 cents of non-operating investment gains, according to Brosseau.

Microsoft's share price has fallen nearly 50 percent since late December and is off 42 percent from just a month ago amid concerns over sluggish PC market growth, the company's legal troubles and a technology market downturn.

The drop has wiped out the so-called ``settlement premium'' that buoyed the stock between October and March, when investors viewed the possible break-up of Microsoft as a favorable outcome to the antitrust suit that would unlock the value of its separate businesses, driving its combined value higher.

Sherlund said a share price between $65 and $70 would appropriately reflect a valuation of 36 to 39 times estimated calendar year earnings of $1.78 per share and a revenue growth rate of 15 percent instead of 20 percent