Ballmer lobbies for Microsoft's R&D spending plan

Microsoft Corp. CEO Steve Ballmer Wednesday defended the company's plan to boost its research and development budget for next year.

Microsoft CEO Steve Ballmer Wednesday defended Microsoft's plan to boost its R&D (research and development budget) for next year to Wall Street analysts who worry the increased investment will lower earnings potential and mean less return to shareholders.

Microsoft right now is preparing for two major product launches -- Windows Vista and Office 2007 -- while trying to gain footholds in nontraditional markets for the company such as Web-based services, security, storage and business intelligence, Ballmer said in a speech to analysts at the Sanford C. Bernstein Strategic Decisions Conference. It is crucial Microsoft to continue to invest in all of these areas because as it has proven in the past, the investment will pay off in the long term, he said.

"If you believe in the opportunity we believe in you have to invest behind it," Ballmer said. "You have to be optimistic about your opportunity to change the world. ...This takes a long-term view. Everything about Microsoft takes a long-term view, I'm afraid."

He used Windows as an example of a product that took a long time to pay off for the company and its investors, but was well worth it. "We announced [Windows] in 1983 but it didn't make any real money until 1993 and 1994," Ballmer said. "I don't think any investor should argue about the payback."

Microsoft announced it would increase its R&D spending by about $US2.6 billion on its third quarter earnings call last month. Wall Street reacted negatively to the news over concerns the company was stretching its operating budget too thin at a time when growth in its core revenue-generating products is relatively flat.

Ballmer acknowledged that Microsoft continues to invest operating expenses in both core products and new markets. "The fact that we have to run some of our growth through our operating income [is] kind of inevitable if you want growth in our company, which the management team absolutely does."

He tried to reassure analysts that this does not mean Microsoft will return less to shareholders, citing how much money the company has returned to shareholders since fiscal 2001 while maintaining a strong cash balance. Microsoft currently has $US34.7 billion in cash.

"We returned $87 billion [b] from fiscal [2001] throughout the end of the last quarter to shareholders and our cash balance is within $2 billion of where it was at the beginning of fiscal year '01," Ballmer said. "We've generated enough cash to pay that."

Still, he acknowledged that the company may have waited too long for a major update to Windows Vista, which Microsoft plans to release to business customers by the end of the year and home users in January 2007. Office 2007, the next update to the company's popular productivity suite, also is scheduled for release at the same time.

"Windows is a product that has to be watered periodically," he said. "We've gone a bigger gap than I'd like to go [this time]."

Microsoft is not yet out of the woods with getting Windows Vista out according to its latest schedule. Last Wednesday Ballmer hinted during a speech in Japan that the product may be delayed further into next year, but then said later in the week that the release would stick with the current schedule. Still, most analysts and industry watchers highly suspect another Vista delay is in the cards.

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