Microsoft executives told investors and analysts that the largest software maker is poised to grow even as sales slow in its main business, personal-computer software.
At Microsoft's annual analyst meeting, Chairman Bill Gates focused on opportunities for growth, such as Internet services and software for business server computers, as well as new PC programs, such as videoconferencing.
PHOTO: AP
Last week, the Redmond, Washington-based company reported the slowest annual sales growth since Microsoft first sold shares to the public in 1986. The company also said that slowing PC sales will cause its sales and profit to fall below analyst forecasts in the current quarter.
"The big question is, are the new features and functionality enough to reaccelerate what's been anemic growth for the last year-and-a-half," said Greg Vogel, an analyst at Banc of America Securities, who rates the shares "market perform." "That's the million dollar question."
The company focused on the need to sell more business PC and server software, which runs corporate networks, databases, e-mail and Web sites. Sales of server software jumped 20 percent last quarter, though that area still accounts for only about a fifth of Microsoft's sales. PC software accounts for about two-thirds of sales.
"Microsoft has a very small percentage of the spend on information technology at large companies," said President Rick Belluzzo.
As part of that effort, the company announced today that Ford Motor Co will use one of its server programs for linking different business software and said that its MSN Internet sites are bringing in more advertising revenue than Yahoo Inc's sites.
MSN is the second most popular network of Web sites in the US, while Yahoo is third.
New products, such as Internet services and the company's first game console, will raise costs, so Microsoft plans to trim costs in other areas, such as hiring. In the fiscal year that began in July, the company plans to hire half as many new employees it did a year earlier. Not including attrition, the company will hire more than 4,000 employees compared to 8,000 in the year ended June 30.
One area the company still intends to spend more on is research and development. The company will increase research spending to US$5.3 billion this fiscal year, from US$4.4 billion, an increase of 20 percent. In the fiscal year ended June 30, the company raised research and development spending 16 percent.
Microsoft also focused on how it can increase sales of PC software, such as its flagship Windows operating system, which runs about 90 percent of PCs. PC sales fell last quarter for the first time since 1986 and Microsoft is counting on its newest version of Windows, which goes on sale in October, to restore growth.
Microsoft Group Vice President Jim Allchin, who heads the Windows division, said many PCs are ripe for replacement and more than 140 million are more than three years old. The company is also looking to new Windows features like videoconferencing and voice recognition to increase demand.
"PC demand has been in a hiatus because there hasn't been a really interesting application," said Mike Stanek, an analyst at Lehman Brothers, who rates Microsoft "strong buy."
"It's applications like video teleconferencing that will drive PC sales again." An almost-final test version of the new Windows, Windows XP, will be released over the weekend, Allchin said.
Microsoft will likely turn over the final product to be manufactured and pre-installed in new PCs by the end of August, analysts said.
On Tuesday, Senator Charles Schumer, a New York Democrat, called on state attorneys general to seek a court order halting the release of Windows XP unless Microsoft agrees to make "significant changes."
US Justice Department officials also should insist on changes during any negotiations aimed at settling the government's antitrust lawsuit, he said.
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