Microsoft Corp investors had one central question in mind at the company's annual analyst meeting in July: How would Chief Executive Steve Ballmer overcome slowing software sales during the personal-computer industry's worst slump in 15 years? Ballmer pointed to his focus on the corporate network software market, where the biggest software maker "kept at it, kept at it," until it created programs that are taking sales from the market leaders.
The wisdom of that growth strategy was apparent when Microsoft reported a 6.2 percent jump in sales yesterday, making it one of only a handful of software makers to report a rise for the quarter ended in September. Investors say the company was helped by Ballmer's focus on business programs, multiyear contracts and effective sales techniques.
"There's no better CEO in this environment than Steve Ballmer," said Noah Blackstein, money manager of the Dynamic Power American Fund, with US$128 million under management. "He's a tough, hard-nosed, no-nonsense person."
Microsoft's new products are the top corporate software spending priorities even as companies pare spending on computers and related gear, analysts say, and Ballmer has led a charge to persuade customers to buy more expensive versions of Windows than they did a few years ago. The Redmond, Washington-based company's shares have gained 31 percent this year, compared with a 15 percent drop in the Dow Jones Industrial Average of 30 companies.
Net income in the period ended Sept. 30, which includes investment losses, fell to US$1.28 billion, or US$0.23 a share, from US$2.21 billion, or US$0.40, a year earlier, Chief Financial Officer John Connors said yesterday.
Excluding investment losses of US$1.24 billion, profit in the recent period was US$0.43 a share. That topped forecasts for US$0.39 a share, the average estimate of analysts polled by Thomson Financial/First Call.
Ballmer, 45, joined the company in 1980 and was appointed chief executive in January last year. He ran Microsoft's sales and support group from 1992 to 1998 and remains involved in sales efforts, meeting with top customers personally.
In the September quarter, Microsoft performed much better than the PC industry at large, analysts say. Even as PC shipments fell 12 percent, according to Dataquest Inc, Microsoft boosted sales by selling more copies of Windows 2000 for running business PCs. That program costs about US$100 more than the consumer versions of Windows that businesses had relied on.
The company's so-called enterprise software, for running corporate server computer networks, has taken sales from rivals Oracle Corp and Sun Microsystems Inc because it's cheaper and more attractive in an economic slowdown, analysts say.
After years of Microsoft releasing what analysts considered to be inferior corporate software, Ballmer has stressed improving quality and providing consulting services that rivals traditionally have sold. He also has pushed his sales force to go for lengthy, in-depth sales pitches needed to sell corporate products.
"It's been a long time since Microsoft cared about pleasing the enterprise community with a quality product," said Greg Tuorto, senior technology analyst at Dreyfus Corp, which owns 14.4 million Microsoft shares. "Ballmer's got a lot to do with that." Windows 2000 for business PCs and servers are the top spending priorities for corporations, according to a poll of chief information officers released in August by a Morgan Stanley Dean Witter analyst, Charles Phillips. Office, the word-processing program that Microsoft updated in May, was tied for the No. 3 spot.
Ballmer has pushed more business customers to sign three-year contracts, which generate a steadier sales flow than selling licences one at a time. Microsoft books sales over the term of a contract, helping the company compensate for slow quarters.
Even so, Microsoft shares fell 30 percent last quarter on investor concerns that Ballmer, paid US$655,520 in the year ended June 30 and Microsoft's second-biggest shareholder, hasn't ensured that the company can continue to sell as customers extend freezes on PC and software purchases.
The company's shares rose US$0.72 to US$56.75 before the earnings report today.
Profit in the current quarter will be US$0.49 or US$0.50 a share, the company said yesterday, less than the average analyst forecast for US$0.51, according to First Call. Sales will be US$7.1 billion to US$7.3 billion.
Analysts had expected the company to lower its targets, though many feared the outlook would be bleaker.
The company's shares inched up 2 percent after the earnings report.
For the fiscal year next year, which ends in June, profit will be US$1.61 to US$1.66 a share, less than analysts expected, on sales of US$28.4 billion to US$29.1 billion, in line with forecasts.
The coming quarters may be tougher, investors say. Even with Ballmer's efforts to sell more corporate network software, Microsoft gets more than two thirds of sales from PC software.
Sales of PCs, originally expected to begin a recovery this quarter after a June period that was the worst since 1986, now won't pick up until the middle of next year, analysts say. Yesterday, Connors said PC sales will be lower than expected in the current quarter and this year.
The Sept. 11 terrorist attacks quashed any remaining hope that holiday sales and the release of Windows XP would help draw the industry out of its slump.
If companies and consumers stop buying software, it won't help that Microsoft is pushing more expensive products, investors say.
Sales stored up from multiyear contracts eventually will dry up in a prolonged slowdown.
Even a good salesman like Ballmer can't close a deal when there aren't any buyers.
"They are umbilically connected to the PC industry," said Eric Upin, an analyst at Robertson Stephens.
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