News

Analysts Seek Microsoft Spending Details

• By The Associated Press
• July 21, 2006

Cash-rich Microsoft surprised analysts several months ago by saying it would commit millions of dollars more for research, development and other costs, hampering its earnings potential through the 2007 fiscal year, which ends in June. Microsoft shares plummeted as analysts demanded more details about the company's vague -- but pricey -- plans.

Microsoft executives offered some relief Thursday during the software company's quarterly earnings call, when they broke down the general areas in which they plan to allocate about $2.7 billion in increased spending.

Still, analysts visiting Microsoft's Redmond campus next week want to learn more about where exactly the money is going -- and what shareholders can expect in return.

"They rolled back the curtain a little bit on those expenses," said analyst Charlie Di Bona with Bernstein & Co.

But, he added, "There's an implicit promise that we're going to get more answers."

Microsoft's big spending plan was especially jarring because many analysts had been preparing for the company to start reaping the benefits of a wave of major product launches, including new versions of its Windows operating system and Office business software. Despite delays, both are due out this fiscal year.

Microsoft also has recently endured some major executive restructuring, including a decision by co-founder Bill Gates to step back from day-to-day duties by 2008. Aside from Gates' decision, much of the restructuring has been aimed at helping the company make decisions more quickly in response to fast-moving competitive threats.

Analysts are also counting on Microsoft to use its newly boosted budget to beat back the competition.

One big challenge for Microsoft is the growing market for software that is available, either free or via paid subscriptions, over the Internet. These products, which people are using for such tasks as checking e-mail and managing business relationships, could eventually threaten Microsoft's two cash cows, Windows and Office, which are primarily bound to desktop computers.

Microsoft said it expects to spend about $500 million more in the current fiscal year on improving its own Internet-based software offerings. The budget includes money for improving its search and online advertising technology -- the key ways it hopes to battle Google Inc. and Yahoo Inc.

Also during the fiscal year, Microsoft expects to spend about $450 million more on marketing, in part because of the launch of new versions of Windows and Office. Another $450 million will be spent on boosting its sales efforts.

Microsoft also said it will increase spending by $1 billion on products that could help reduce its traditional dependency on Windows and Office. These include security and more sophisticated communications technology.

The final $300 million will be for general spending increases and potential acquisitions.

Although analysts were caught by surprise by the big spending spree, many say they are glad Microsoft is more aggressively competing and expanding its business further as Office and Windows face an ever-more-saturated market.

"I would be much more concerned if Microsoft wasn't spending the money to make this bet," said Toan Tran, an equity strategist with research firm Morningstar.

Still, analysts want assurances that this new spending will pay off. After all, in recent years Microsoft has invested heavily in far-flung ventures such as software for watching and recording television.

So far none have come close to bringing in revenues like Office and Windows. For example, although Xbox 360 is considered a hit, the unit that includes the videogame console lost $414 million in the quarter that ended June 30.

"They've been talking now about these new businesses for five years and really saying, 'They're going to bear fruit. They're going to bear fruit.' And so far that hasn't happened," said analyst Matt Rosoff with independent research company Directions at Microsoft.

At some point, Rosoff said, analysts might start asking, "Do you abandon ship?"