LOS ANGELES (AFX) -- Microsoft Corp. shares tumbled more than 11% Friday, their biggest percentage decline in almost six years, as investors reacted swiftly to the software giant's disappointing quarterly results and lowered financial forecast.
The stock, a component of the Dow Jones Industrials Average, fell $3.10 to $24.15 the day after Microsoft reported fiscal third-quarter profit and sales that lagged Wall Street expectations.
The drop at one point was the largest one-day loss since Microsoft lost a key U.S. antitrust court ruling in 2000, according to Thomson Financial, and reduced the company's market worth by more than $33 billion. More than half a billion shares traded hands, the second-highest volume in Microsoft's two decades as a public company.
The maker of the ubiquitous Windows computer operating system and Office business applications said it would spend more on other software, as sales growth of its two big products slows.
Microsoft 'dropped an [earnings] bomb on investors with ridiculously high levels of spending' for next year, according to Credit Suisse analyst Jason Maynard.
Microsoft didn't provide specific estimates for its spending plans, but analysts estimated the company could spend as much as $2 billion more than they'd expected in the coming fiscal year.
The spending plans prompted Microsoft to issue a profit forecast for its upcoming fiscal year that was well below analyst estimates.
The lowered forecast directly reflects 'the threat of software as a service and online business models to Microsoft's legacy, PC-centric franchise,' Maynard told clients.
Microsoft is spending to boost its presence in areas like Web-based software, often called 'software as a service,' as it looks to better compete with rivals like search giant's Google Inc. and Yahoo Inc.
The stock drop wiped out more than $3 billion in wealth for Microsoft co-founder and Chairman Bill Gates, who saw his stake cut to $23.6 billion.
More spending
Chief Financial Officer Chris Liddell said that Microsoft plans 'to quicken the pace of development on businesses where we can drive growth and build meaningful share.'
The company plans to focus on areas like services, collaboration, business intelligence, along with security and high-performance computing, the CFO highlighted during a conference call. The company has also stepped up the pace of acquisitions, he said.
'The main reasons for the miss can be summed up as 'short-term pain for long-term gain,' according to analyst Matt Rosoff at Directions on Microsoft, an independent research firm that tracks the company.
Redmond, Wash.-based Microsoft said its fiscal third-quarter profit rose 16% and revenue increased, boosted by stronger demand for its software used to run corporate servers and personal computers.
Still, the results were at the low end of a forecast issued by Microsoft in late January, and sales fell just short of analyst expectations as the company steps up its investment in new areas it hopes to dominate.
In transition
'Microsoft is in a transition period and it's important for investors to note that,' said Todd Lowenstein, who co-manages the HighMark Value Momentum fund.
Analyst Brad Reback at CIBC World Markets downgraded Microsoft two notches to sector underperformer from sector outperformer, citing a lack of clarity on when the company's higher spending will moderate, and translate into revenue growth and stronger profitability.
Morgan Stanley analyst Mary Meeker also downgraded the stock, moving to equal weight from overweight.
Microsoft is in the throes of releasing a slew of new products while it readies the next version of Windows, which runs nearly 90% of the world's PCs. Known as Vista, the new operating system -- along with the next version of Office -- has stoked optimism that the company will see a growth spurt during the next year or two.
The company is 'at the front end of a new product cycle, a very exciting one,' said Lowenstein, whose fund owns Microsoft shares and who remains bullish on the stock. He observed, however, that the results and forecasts were 'an across-the-board disappointment.'
Indeed, both the just-released earnings and updated forecasts reflect the impact of investments in new initiatives, which the company hopes will have an even bigger impact on the bottom line over the long term, according to Colleen Healy, director of investor relations.
Commenting on the increased spending plans, Liddell, the CFO, said: 'We appreciate that every time we make an investment decision, it is traded between the short-term earnings and the long-term gain.'
He said the company, however, is 'willing to make those trade-offs' in order to drive long-term growth.
Profit, revenue increase
Microsoft said net income for the fiscal third quarter ended March 31 rose to $2.98 billion, or 29 cents a share, from $2.56 billion, or 23 cents, a year earlier, boosted by stronger demand for its software used to run corporate servers and personal computers.
The per-share results -- which came in at 31 cents after stripping out a legal charge of 3 cents a share, and due to rounding -- lagged the average estimate of analysts polled by Thomson First Call, who expected a profit of 33 cents.
Sales rose 13% to $10.9 billion as Microsoft saw a sharp rise in demand for other software targeted at corporate users. Its home-entertainment unit was helped by higher sales of its Xbox video game player.
The top-line result was just below the $11 billion expected by analysts.
Sales at Microsoft's server business came in solid, rising 16% as the company continued to reap the benefits of several new product launches late last year. The company's flagship Windows segment posted a 7.5% rise in revenue on higher sales of PCs, while sales at its business responsible for its Office programs rose 5%.
The home-entertainment business posted an 85% surge in sales and the mobile business saw revenue jump 46%, while sales at its business-solutions segment climbed 21%.
The MSN Internet business saw its revenue fall 3.4%.
Investors had pushed Microsoft shares just over 4% this year ahead of the results on hopes for the new products. But the company's stock price was less 10% higher than it was three years ago, trailing far behind a more than 60% gain in the tech-heavy Nasdaq Composite Index.
Last month, Microsoft said it was delaying until early 2007 the release of Windows Vista for consumers, missing out on the important upcoming holiday selling season. The company will ship its version for corporate users in November as planned.
Hot on the heels of news of the delay, the company unveiled a far-reaching restructuring of the unit responsible for its flagship operating system.
Outlook falls short of hopes
For the current fiscal fourth-quarter the company predicted a profit of 30 cents a share on revenue ranging between $11.5 and $11.7 billion. On average, analysts' estimates put Microsoft's fourth-quarter profit of 34 cents a share on revenue of $11.64 billion.
Offering an initial glimpse into results for fiscal 2007, Microsoft pegged its profit at $1.36 to $1.41 a share on revenue of $49.5 to $50.5 billion. Estimates for fiscal 2007 were for a profit of $1.53 a share on revenue of $49.53 billion.
Rosoff, the Directions on Microsoft analyst, said the revenue growth outlook for the coming fiscal year, while accelerating from fiscal 2006, was 'not as high as might have been expected given new releases of Windows and Office.'
'This really shows me the importance of Microsoft's emerging businesses, such as online advertising, mobile and gaming,' he said. 'It also shows how critical the server and tools business is to Microsoft's growth prospects for the next couple of years.' This story was supplied by MarketWatch. For further information see www.marketwatch.com.