Ballmer: Vista forecast too rosy
Seattle Times technology reporter
In a Thursday presentation, Microsoft CEO Steve Ballmer outlined nine growth opportunities over the next three years worth at least $500 million each, including:
Big accounts: Selling software to PC makers, Microsoft's bread and butter. This has the largest potential to increase gross margins.
Corporate desktops: Selling more software per desktop at existing corporate customers and getting new and existing customers to equip more of their employees with computers.
Server sales: Building market share for server software that runs Web sites, networks and business databases.
Emerging desktops: Replacing pirated software with legal products at big companies in developing economies.
Advertising: Selling online advertising across its various new and established Web sites and services, in direct competition with Google and Yahoo!
Xbox: Turning a profit from game sales and Xbox Live subscriptions.
Microsoft Chief Executive Steve Ballmer warned Wall Street analysts Thursday to dial down their assumptions of how much Windows Vista, the company's newly released operating system, would contribute to revenues next fiscal year.
"I'm really excited at how enthusiastic everybody is about Vista," Ballmer said during a presentation to analysts in a New York City hotel. But some independent forecasts for revenues from Vista in the 2008 fiscal year, which begins July 1, are "overly aggressive," he said.
In some cases, analysts have estimated revenue from the new version of Windows would grow much faster than the PC market as a whole, Ballmer said.
Market researcher IDC estimates PC sales will grow about 11.3 percent globally in 2007, and about 7 percent in the United States.
Ballmer said he expects Vista sales to do only a bit better than IDC's growth forecast for developed markets.
"I don't think that much new money is going to race out of the consumers' pockets into PCs," Ballmer said.
"I do think PC growth will be buoyed by Vista. I believe in that. And yet I think most people think that means PC growth rate will double year-over-year. ... It's a weird disconnect from my perspective."
Ballmer spoke after the markets had closed. Microsoft shares fell 51 cents to $28.95 in extended trading after gaining slightly during the regular session.
Shares have declined about 3.3 percent since Vista and Microsoft's other flagship product, Office 2007, were broadly launched Jan. 30.
Analysts make their own financial models of sales and expenses to try to predict companies' profits and make recommendations of whether to buy, sell or hold stock.
Ballmer described sources of revenue from Vista other than growth of the PC market.
In developing economies such as India and China, sales are expected to grow at faster rates. But that won't contribute as much in real dollars because the growth comes off of a smaller base, software piracy is a bigger problem and Microsoft sells lower-priced versions of its products.
Fighting piracy could help drive some revenue growth, Ballmer said.
In Microsoft's lucrative big-business market, many corporate customers have already paid for Vista upgrades as part of long-term software licensing agreements.
Retail sales to users installing the software on existing PCs have spiked since Vista became available, though not to the levels seen when Vista's predecessor, Windows XP, launched in 2001.
Ballmer doesn't expect the retail surge to continue during the next fiscal year.
He said people forget that a new Windows release is "primarily a chance to sustain the revenue we have."
In fiscal 2006, the division responsible for Windows generated $13.09 billion, or 29.5 percent of Microsoft's revenues.
"Every new Windows release is not necessarily a huge revenue-growth opportunity," Ballmer said. "But if we don't have exciting, fantastic, outstanding Windows releases, there will be either a drop in the PC market and/or there will be uptake of Linux and Mac and all of these other things."
Ballmer was not specific about whose Vista revenue estimates were too high.
Ken Allen, an analyst at T. Rowe Price Associates, said Ballmer tends to be conservative and his comments were probably aimed at analysts with the highest expectations.
"At the end of the day, I don't think it's a major variance from what the market expected and in line with what I would have expected," Allen said.
T. Rowe Price is the seventh-biggest institutional holder of Microsoft shares.
The presentation was billed as a strategic update to give analysts a better sense of the company's direction. Chief Financial Officer Chris Liddell announced plans for the update last summer after a communications lapse with Wall Street sent the stock crashing 11.4 percent April 28.
"We are conscious of communications — obviously an incredibly important issue for us — and conscious of the fact that we had a disconnect in the [fiscal] third quarter between the way that we were thinking about the business and the way that you were thinking about it," Liddell said at Microsoft's annual financial-analyst meeting in July.
Microsoft was thinking about spending $2.7 billion more on marketing, acquisitions, its battle with Google and Yahoo! and other efforts to expand into new markets in the current 2007 fiscal year. The figure was much bigger than many analysts expected going into the company's fiscal third-quarter earnings report last April.
Thursday, Ballmer told analysts the company's operating expenses would grow less than $2.7 billion in the 2008 fiscal year, "but I wouldn't expect a huge drop."
Microsoft will give more specific financial guidance for the next fiscal year during its third-quarter conference call April 26.
Material from Bloomberg News is included in this report. Benjamin J. Romano: 206-464-2149 or firstname.lastname@example.org
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