An Unfinished Story
Microsoft is planning to invest so much money next year that it
will depress its future earnings. But both financial analysts and
Microsoft partners will have to wait until July to find out where
all that money will go.
Wall Street reacted swiftly to Microsoft's
disclosure during the company's third-quarter earnings call that
its projected earnings for fiscal 2007 (July 1, 2006-June 30, 2007)
would be well below analysts' expectations. The next day, April
28, Microsoft's stock plunged 11 percent, the largest single-day
drop in Microsoft's stock value in five years. The decline wiped
out about $32 billion in Microsoft's market value, the equivalent
of about $3 billion for Bill Gates and $1 billion for Steve Ballmer.
In published interviews, analysts reported feeling
blindsided by the news. With Microsoft's investments in developing
SQL Server 2005, Windows Vista, Office 2007, Exchange Server 2007
and Windows Longhorn Server, the view from the Street had been that
2007 was a time for Microsoft's profits to soar. With so many years
between major releases, investors had hoped that all Microsoft's
spending on product development would finally pay off.
But the company's forecast for its fiscal 2007 calls for operating
income of about $19 billion on revenues of about $50 billion. The
company's diluted earnings per share projections of $1.36 to $1.41
were lower than analysts expected. Reading the tea leaves behind
Microsoft's earnings-per-share projections, analysts see Microsoft
spending about $2 billion more than the outside experts had anticipated.
The prevailing view: Spending will be devoted to the company's
efforts to challenge Internet search engine rivals Google Inc. and
Yahoo Inc. Despite trying to boost MSN Search, Microsoft has actually
been losing ground against its search rivals in recent user-behavior
surveys. Meanwhile, MSN revenue actually declined during the financial
quarter. The business segment saw revenues fall 3 percent to $561
million and swung from being $102 million in the black to $26 million
in the red. The MSN division reportedly has about 20 Internet service
projects in development.
Initially, Microsoft said it wouldn't give any details on its R&D
plans until a July analyst meeting. But as the stock price fell,
Ballmer provided more tidbits for fiscal 2007: MSN R&D will
get $1.1 billion and capital expenditures will be $500 million.
"We have told our R&D folks that our number one priority
is software as a service," Ballmer said.
Meanwhile, Microsoft invested in the channel for its traditional
businesses during its third financial quarter, which ended March
31. It spent $68 million more on partner marketing and Windows Vista
pre-launch programs than it had the year before in the client business
segment. Within Microsoft Business Solutions, an increase in sales
and marketing expenses also reflected channel development.
Scott Bekker is editor in chief of Redmond Channel Partner magazine.