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Microsoft to miss mark on earnings, revenues

Microsoft Corp., dogged by a slump in personal computer sales that the software giant expects to continue or even worsen in the coming months, warned that its fiscal first quarter earnings and revenues will fall short of Wall Street's expectations.

But the software giant tried to put a positive spin on the news, predicting that the company's new desktop operating system, Windows XP, would boost sales somewhat after the product is released in the company's fiscal second quarter.

Microsoft's warning, which came with its year-end report, led a host of tech earnings released after regular markets closed Thursday:

Sun Microsystems Inc. lost $88-million in the fourth quarter, its first quarterly loss in more than a decade, but the maker of high-power network servers, storage gear and workstations still beat analysts' expectations.

Gateway Inc. reported a second-quarter loss and dramatically reduced its second-half forecasts, citing a continuing slump for the PC industry in the United States and abroad.

EBay Inc. provided good news, saying second-quarter profits more than tripled and that business will be even better than expected for the rest of the year.

But all eyes were on Microsoft, which said it barely eked out a profit of $66-million, or 1 cent a share, in its fourth quarter ended June 30. That compares with net earnings of $2.41-billion, or 44 cents a share, in the same period last year.

The earnings number includes a massive $2.6-billion charge for the quarter for poor-performing investments. Analysts polled by Thomson Financial/First Call had predicted earnings of 43 cents a share before the charge; Microsoft did not provide a comparable figure in its earnings release.

Citing softening demand for personal computers, Microsoft also said it expects profits in the first quarter of its fiscal year to be between 39 cents and 40 cents, well below analysts' expectations of 45 cents. It forecast revenue of $6-billion to $6.2-billion for the first quarter, slightly below analysts' projections of $6.27-billion.

"We believe PC shipments are likely to deteriorate before turning around in 2002," chief financial officer John Connors said in a call to journalists and analysts.

Greg Vogel, an analyst with Banc of America Securities, said the warning puts even more pressure on Microsoft for its new operating system, Windows XP, to be successful when it is released in October.

"While XP looks to be a pretty strong product and a somewhat important upgrade . . . there may not be enough to get (consumers) to run out and upgrade as they did with Windows 95," he said.

Connors said he expected investors to be more focused on the company's strong revenue performance for the quarter. Revenues for the quarter ended June 30 were $6.58-billion, up 13 percent from $5.8-billion last year and in line with what Microsoft forecast last week.

Still, the profit warning positioned Wall Street for another erratic session today. Shares of Microsoft fell $3.37 in after-hours trading after finishing the regular session on the Nasdaq Stock Market up $2.00 to $72.57.

Investors will also zoom in on Sun, which lost 3 cents per share during the three months ended July 1. That compared with a profit of $720-million, or 21 cents per share, a year ago.

Excluding one-time gains and losses, Sun earned 4 cents per diluted share, down from 21 cents a year ago but a penny ahead of Wall Street's expectations.

Sun officials refused to speculate on whether the company has hit bottom. "This economy is still incredibly unpredictable," said Scott McNealy, Sun's chief executive.

But analysts said the strength in U.S. sales, which grew 14 percent, was unexpected and positive.

"One could say there was a glimmer of positive news in terms of the domestic U.S. business at Sun," said Richard Chu, an analyst at SG Cowen Securities Inc. "It was a little bit better than we thought."

Shares of Sun Microsystems closed up 45 cents, to $14.44, in regular trading. After hours, shares were up 12 cents.

Things are more uncertain at Gateway. For the three months ended June 30, the computer manufacturer lost $20.8-million, or 6 cents per share, compared with profits of $118-million, or 36 cents per share, in the year-ago quarter.

Gateway lost 2 cents a share excluding one-time items, a penny more than analysts forecast. The company lost revenue as it shed unprofitable products and stores and because the entire U.S. market for consumers slowed for the third consecutive quarter, said chief financial officer Joseph Burke.

"It's a tough environment right now," Burke said.

Shares of Gateway fell 88 cents, or 5.7 percent, to close at $14.59, before the results were released. In after-hours trading, the shares fell to $13.

Gateway expects to break even for the second half of 2001. Thomson Financial/First Call had estimated the company would earn 11 cents per share in the third quarter and 21 cents per share in the fourth quarter.

Countering Gateway was eBay. In the three-month period ending June 30, eBay earned $24.6-million, or 9 cents per share, on revenue of $180.9-million. In the year-ago quarter, the company earned $7.5-million, or 3 cents per share, on revenue of $98.2-million.

Moreover, the mammoth Internet marketplace said second-half earnings per share, excluding charges, are expected to be as much as 21 or 22 cents; Wall Street was expecting 20 cents.

"We're really proud of how the company is running right now," said Meg Whitman, eBay's president and chief executive.

Shares of eBay fell $2.14 to close at $64.40 before the earnings report. The stock jumped to $66.89 in extended trading.

_ Information from the New York Times was used in this report.

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