Microsoft Gives Peek at Financial Forecast

Software maker laments the shaky economy, says it's pursuing seven business opportunities.

Microsoft Corp. on Thursday painted a sober picture of the global economy and its own financial outlook, saying there are a number of assumptions and risks that investors need to be aware of.

In a teleconference with the media and analysts on Thursday to present the Redmond, Wash., companys second-quarter financial results, John Connors, Microsofts chief financial officer, said Microsoft has built at least seven important assumptions and risks into its financial forecast.

These include building a sales pipeline for fiscal 2003 and beyond. While Microsoft will continue to add significant resources to its field and partner-led sales effort for the rest of the year, it expects this effort to only yield results in fiscal 2004.

"Investors must also understand that we expect a sequential decline in unearned revenue for the next quarter, and any sequential growth in the fourth quarter is likely to be modest and reflects the fact that we saw such a huge surge in billing in the last half of fiscal 2002 and the first quarter of 2003—a trend we dont expect to recur," he said.

The economy continues to be shaky, and Microsofts forecast assumes no further deterioration on that front in the second half of the current fiscal year. "Linux continues to be a threat to our server business. The ramifications of free software to our business model should be obvious to everybody," Connors said.

Microsoft is also pursuing seven business opportunities, on which it is executing successfully and hiring "great leadership," which is "no easy feat. If we continue to execute well, the opportunities are great. If not, there is a risk to our outlook," Connors said.

Another risk is fiscal 2004 comparables for revenue and profit will be somewhat daunting. Microsoft is beginning the planning process for setting its targets. "It sure would be great to get some help from a better world economy, and well just have to see how that economy evolves. Comparables for 2004 are tough," he said.

Lastly, while Microsoft now has more clarity on the legal front, following Judge Colleen Kollar-Kotellys decisions last November and the proposed settlement of the California class-action lawsuits, nonetheless, the company still faces considerable legal risk, something investors need to be mindful of, Connors said.