Windows Vista Waffling Sends Microsoft Shares Down

Published July 28, 2006

| Reuters

Microsoft Corp. (MSFT) on Thursday failed to quash fears that a new version of its Windows software system would be further delayed, stirring concerns that a new technology cycle tied to the upgrade could be put on hold.

This uncertainty over when Microsoft and the rest of the high-tech industry would benefit from the surge in revenue growth that typically accompanies a major Windows upgrade led Microsoft's shares to close down 2 percent at $23.87 on the Nasdaq on Thursday.

"We will ship Windows Vista when it is available," Kevin Johnson, co-president of Microsoft's platforms and services unit, said at the company's annual financial analysts' meeting, adding that Microsoft would take the project "milestone by milestone."

Windows sits on more than 90 percent of the world's personal computers.

Windows Vista, already five years in the making, has been postponed by Microsoft several times.

Quality assurance delays have put off the consumer version of Windows until early 2007 — after the crucial holiday shopping season.

Vista is set to ship to corporate customers this November.

Goldman Sachs (GS) analyst Rick Sherlund said the cautious comments represent a delayed confirmation of his thesis that Microsoft would not begin to see revenue from the general availability of Windows Vista until March or April 2007.

"When they hesitate, that's confirmation we were right," he said.

Microsoft has consistently been this cautious in the past, an acknowledgment of its history of slipping a few months beyond initial targets for major software releases, Sherlund said.

Greg Palmer, head of equity trading at Pacific Crest Securities, asked at the meeting: "Explain why I'm paying 20 times for a stock that is growing at 10 with a whole lot of investments that are not really going anywhere."

Technology stocks sold off, driving down the broader U.S. market, as further Windows delays could slowdown plans by businesses and consumers to upgrade computers and software.

FOUR PILLARS OF GROWTH

The new Microsoft is being built on "four pillars," Microsoft's Chief Executive Steve Ballmer said in opening comments at the meeting.

Upgrades to the company's two core products — the Windows operating system and Office applications suite — should act as engines to drive growth and buy it time to erect two new pillars: its Internet and Xbox game businesses.

Chief Financial Officer Chris Liddell said Microsoft was in "high investment mode" and very acquisitive over the past year, spending $649 million to acquire 23 companies. He said it acquired four companies in July.

Microsoft last week forecast revenue for the fiscal year ending in June 2007 to grow 12 percent to 14 percent, to between $49.7 billion and $50.7 billion.

Revenue from its Windows business is growing 8 percent to 10 percent, Johnson said on Thursday. Windows, nearly a third of Microsoft's total revenue, should generate between $14.3 billion and $14.5 billion in fiscal 2007, he said.

Microsoft forecast another year of losses at its mobile phone, games and devices business before turning a profit in the business year ending June 30, 2008.

Executives at the meeting said investments for the company's new "Zune" media player and another year of losses at its Xbox game unit would continue to weigh on the entertainment and devices unit's earnings this year. The division posted a loss last year.

"Fiscal '07 will be a loss. We think that turns to profit in '08," said Robbie Bach, president of the division.

The entertainment and devices division encompasses much of Microsoft's consumer-oriented products, such as Windows-based smartphones, the Xbox 360 game console and its upcoming "Zune" media player, but has not been a consistent earnings driver.

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