Despite economy, Microsoft shrugs and looks ahead

The stock market gyrated last week, and technology vendors continued their battles with the sluggish economy, yet Microsoft shrugged off the outside world and kept on going like the Energizer bunny on supercharged batteries.

"I sure hope we're not nuts about all this investment for FY03," said John Connors, Microsoft's chief financial officer, during the company's annual meeting with financial analysts. "I think it's going to be a heck of a fun year. If we do well, next year will be a fun meeting. If we don't, you can tell us we're on the road to the nuthouse."

Flush with US$38.7 billion in cash and fresh off 12 percent revenue growth, the software maker is painting a sunny picture for fiscal 2003, boosting its 50,500-person head count by 5,000 employees and pouring $5.2 billion into research and development, a 20 percent increase over last year.

The announcement runs counter to what has been a drumbeat of news about cutbacks in spending and layoffs in seemingly every sector of the IT world.

Microsoft Chairman and Chief Software Architect Bill Gates said the increase in R&D spending might seem "very counterintuitive," if viewed in the short term. But he noted his belief in taking a long-term, aggressive approach.

"We have a lot of belief in the things we're doing, both in terms of growing the markets we're in, gaining share in the markets we're in and doing a lot of things that will help this industry be very strong in the years ahead," Gates said. Micosoft is "in a mode right now where we're able to hire more great people than ever in our history."

Analysts agreed. Microsoft finds itself in "probably the strongest position relative to the rest of the tech industry that they've ever been in," said David Readerman, a financial analyst at Thomas Weisel Partners LLC in San Francisco.

Given Microsoft's outlook, Readerman said, some might question why the company isn't investing even more. "The reason is probably because they don't want the Justice Department and the rest of the valley to think they're going to conquer the world," he said. "But they certainly could."

Microsoft didn't provide extensive details about each of its planned areas of investment. But it spotlighted projects including its .Net initiative, the upcoming Office 11 suite, business applications from its Great Plains and Navision acquisitions and new consumer-oriented products and services.

Paul Flessner, senior vice president of Microsoft's enterprise server group, said plans now call for a 22 percent increase in server salespeople, a 15 percent increase in account managers, a 47 percent increase in developer salespeople and a $500 million investment in channel partners.

Connors said part of the company's investments also will be used to pay for people hired in the fiscal year that concluded on June 30 and "unlike most companies in the industry, giving people a raise."

"Cash is piling up faster, obviously, than they can put it to use," said Andrew Weis, an analyst at Austin, Calvert & Flavin in San Antonio. "Microsoft's starting to look more like a bank than a software company, except banks don't make that much money."

Rick Sherlund, an analyst at The Goldman Sachs Group Inc. in New York, said Microsoft is succeeding while other technology vendors are struggling, at least in part because PC growth declined only 4 percent last year whereas enterprise software companies saw a 30 percent drop.

Jim Allchin, group vice president in Microsoft's platforms group, noted that his company saw a 16 percent increase in client revenue despite the anemic PC growth. He attributed that to a "great" and "very well accepted" Windows XP product and the increasing popularity of the more expensive Windows Professional edition.

"In a tough environment, we've done very, very well," he said.

According to Allchin, 60 percent of all Windows client licenses sold in the fiscal fourth quarter, which ended June 30, were Windows XP Pro, and "a lot" of that demand came through Microsoft's volume licensing programs.

Connors noted that the licensing business gives Microsoft unearned revenue in fiscal 2003 "that is a little bit unusual compared to years past."

"And we're giving people plenty of investment to make '03 a breakaway year," Connors said, pinning the "absolute level of increase" in investment in fiscal 2003 at $1.2 billion.

Microsoft is optimistic about the future, since the company estimates that 400 million PCs are still running the Windows 9x or Windows NT 4 code base, Allchin said. Also, less than 50 percent of enterprise customers, less than 20 percent of small business customers and less than 10 percent of consumers hold licenses for the Windows Professional edition, he added.

"This year, we've got new scenarios coming and new form factors that I think will again excite the consumers," Allchin said. He noted the upcoming Service Pack 1 for Windows XP that's due soon, the Windows Media 9 series coming out Sept. 4, the Windows XP Tablet PC Edition expected this fall and the Windows XP Media Center Edition targeted for later this year.

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