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ComputerWire: IT Industry Intelligence

Microsoft Corp blamed slowing sales in its enterprise business and continued softness in PC sales for missing the third quarter profits targets, announced yesterday.

Executives also restated guidance for fiscal 2003 against a background of continued economic uncertainty and increased investment in staffing and products like the Xbox. The company expects diluted earnings per share of $1.89 to $1.92, down from $2.01.

John Connors, chief financial officer, said Redmond, Washington-based Microsoft will invest at the expense of profits in the short term. He told Wall St analysts this would lay the foundation for profitability and continued growth in the long term.

Addressing the Xbox, in particular, Connors said: "If we continue to execute well we can finish fiscal 2003 with an installation base of nine to 11 million consoles." He revealed Xbox uptake was slower than expected in Japan and Europe, where the company yesterday announced a new price of 299 euros ($266) from 479 euros ($426).

Connors said Microsoft would also undertake "significant" investment in sales. The company plans an entire division dedicated to sale of knowledge-based products and expansion of those who push enterprise products, such as SQL Server, to corporate customers. Enterprise software and services rose less than two percent to $1.28bn, with Connors pronouncing himself "disappointed" with sale of services.

Microsoft is basing its investment predictions on a slow return to business normality in 2003, as it expects business will pick-up during the second half of 2002. Connors said: "It appears we may be beginning to see the bottom. We expect growth during the next six months."

The third-quarter of 2002 made unappetizing reading for Microsoft. The company reported a 11% increase in net income to $2.7bn on 13% increase in revenues to $7.2bn for the period to March 31, and earnings per share of $0.49 - up from $0.44. Microsoft missed analyst predictions for the period by two cents.

Sales of desktop applications, including the popular Office suite, rose just one percent to $2.44bn and tools declined 12%. Company claimed revenue from Visual Studio.NET, launched during the quarter, would not appear until later in the year as customers bought the suite through their annual subscription to the Microsoft Developer Network (MSDN). Microsoft also footed a $1.2bn impairment on investments in AT&T.

Of greater comfort were revenues from desktop platforms, including Windows XP, which rose 11% to $2.29bn. Connors claimed sales in the PC sector had been better than expected, which offset softness of enterprise sales. Consumer software, services and devices which include MSN Internet and Xbox rose to $1.07bn from $460m, boosted by sales of the games console launched in November 2001.

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