Microsoft Highlights 2007 Business Challenges, Opportunities

Company executives predict mixed success in 2007, but say Microsoft's current array of opportunities for growth and innovation is the largest that it has ever faced.

There are a number of challenges and opportunities that will affect Microsofts financial performance in the fourth quarter of 2006 as well as its 2007 fiscal year, the company said.

During a media and analyst call on April 27, Chris Liddell, Microsofts chief financial officer, spent a lot of time detailing the key assumptions the company used when forecasting expectations for those periods.

PC unit growth was estimated to rise between 10 and 11 percent in the fourth quarter, while total server growth was likely to remain unchanged at between 11 and 13 percent for the full fiscal year, Liddell said.

Microsoft also expects overall IT spending, and its ability to participate in the marketplace, to remain healthy, he said.

On the client side, Microsoft expects revenue growth of 7 to 8 percent for the fourth quarter, with OEM unit growth likely to grow in line with the market, but commercial and retail business growth is expected to lag in its overall growth, Liddell said.

With regard to servers and tools, expected revenue growth is 17 to 18 percent in the fourth quarter, buoyed by strong demand for SQL Server, Liddell said.

/zimages/4/28571.gifClick here to read about the release of Service Pack 1 for SQL Server 2005.

On the information worker side, revenue is expected to rise between 5 and 6 percent in the fourth quarter, with a broad public beta for Office 2007 to be released this spring.

But revenue for MSN is expected to fall between 4 and 5 percent in the fourth quarter, reflecting continued decreases in its Access business and the continued transition to its AdCenter. MSN is also not expected to be profitable in fiscal 2007, he said.

On a more positive note, home and entertainment revenue is expected to surge between 85 percent and 110 percent in the fourth quarter.

While the fourth quarters guidance is below the numbers supplied in January, this is because of the higher product costs involved in delivering as many Xbox 360 consoles to market as quickly as possible, which would cost some income growth in the short term, Liddell said.

Other contributors to the shortfall, he said, were the marketing, partner readiness, increased hiring underway in Microsofts sales force for those soon-to-be-released products. He also attributed it to Microsofts move to quicken the pace of development of business where it could drive growth and build meaningful share, including services, unified communications and collaboration, business intelligence, security and high-performance computing.

/zimages/4/28571.gifClick here to read more about how demand for Xbox Live is driving Microsofts revenue.

Liddell said Microsoft is expecting, at this early stage, both the PC and server hardware markets to moderate from the growth rates seen in 2006, also due to a number of factors. In 2006 the PC unit growth rate dropped from 15 to 17 percent in the first quarter to 10 to 11 percent in the fourth quarter.

"We are not expecting the trend to significantly weaken from that, but expect that moderating number to be more like what we expect for next year," Liddell said.

Microsoft also did not forecast any significant changes in foreign exchange rates, assuming enterprise agreement renewal and discounting trends remain within their historical ranges. The projections also assumed the launch of Windows Vista and Office 2007 to business customers before the end of the 2006 calendar year and Vista being available to consumers in January.

/zimages/4/28571.gifTo read more about Microsofts delay in releasing Windows Vista, click here.

"This will be the first time since calendar year 1995 that we have had simultaneous launches of these two flagship products and we will make a considerable marketing and sales investment for these launches and, to a lesser extent, for the launch of Exchange 12," Liddell said.

Liddell said Microsoft believes that it currently faces the largest array of opportunities for growth and innovation that it has ever faced, with software and software-driven services playing an increasingly important role in shaping customer experiences at work and home.

Asked whether Microsoft had, in the legal expense add-back for the third quarter, added back a reserve it may have taken for the possible daily 2 million Euro fine the company could face, and whether it had built anything into its guidance for that fine, Liddell said the company did not specifically comment on individual items.

/zimages/4/28571.gifClick here to read more about Microsofts battle to avoid an antitrust fine from the EU.

"But, if I can put it this way, it is no change from our present position and nothing inside the legal reserve has changed," he said.

Asked by an analyst at JP Morgan if Microsoft were front-loading the headcount and marketing costs for 2007, and if there would be any incentives to give Vista upgrade rights to those consumers who bought computers during the holiday season, Liddell again declined to give any details.

While he did say that Microsoft had clearly front-ended some of the hiring associated with some product development for future years, he declined to talk about any possible upcoming incentives for Vista.

Rick Sherlund, a financial analyst with Goldman Sachs, asked Liddell if Microsoft was ramping up its online business and building a "Google or Yahoo" inside the company, given that its expenses were about $2.4 billion more than he had estimated.

Liddell said while he would not get to the same $2.4 billion number, "I would characterize this as being a broad-based approach across multiple fronts. I dont think there is any Trojan horse there that we havent talked about that is sitting below the surface and that we dont want to talk about," he said.

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