Microsoft Continues To Invest Despite PC Sales Slowdown

For a company accustomed to multibillion-dollar profits annually, including a $12 billion gain in fiscal year 2002, Microsoft's projection this week is modest by comparison, yet ambitious relative to most other U.S. companies, the CEO said. He noted there are fewer than 100 U.S. companies that post profits of more than $1 billion annually.

"Nothing is going to be a miracle. Growing operating profits north of $12 billion is hard," the CEO said, giving financial analysts hard numbers detailing the growth slowdown expected by slowing PC sales. "Growing by $1 billion a year is a nontrivial challenge. That is one of our bold goals."

In total, Microsoft expects to increase revenue between 11 percent and 13 percent in fiscal year 2003 to between between $31.4 billion and $32 billion, up from $28.4 billion in fiscal year 2002, and profits to be up between 6 percent and 8 percent during its 2003 fiscal year, Connors added.

Rather than inflating the profit levels over the short term by cutting back on capital expenditures, Microsoft will continue to invest heavily in R and D and head count this year,on the order of $5.2 billion and 5,000 additional employees,to establish .Net business for the longer term, Ballmer said.

Ballmer and Microsoft CFO John Connors spelled out the projected growth rates, opportunities and risks in each of the company's seven business units for its 2003 fiscal year on Thursday at the company's financial analyst meeting.

It's a significant change from the financial reporting matrix in recent years, in which Microsoft detailed revenue and earnings for its enterprise business, desktop platforms, desktop applications and consumer businesses. Those segments grew by 6 percent, 16 percent, 1 percent and 51 percent, respectively, in fiscal year 2002, which ended June 30.

For fiscal year 2003, which began July 1, Microsoft expects 7 percent to 8 percent growth for its Windows client business; 10 percent growth for its knowledge worker unit, dominated by Microsoft Office business; and between 13 percent and 18 percent growth for its server and tools business, Connors said.

Ballmer said it would be a "miracle" for the company to return to an era of 30 percent-plus growth in its Windows and Office franchises. "We're in a different time in the market," said Ballmer of the slowing PC market. "We have a lot of competition from devices that has an impact of cannibalizing PCs and Windows.

Office will continue to face market growth and competitive challenges, though the CEO identified opportunities in new applications and Web services developed for Office and other added-value services. "That would be a miracle. Don't plan on that," Ballmer said

The software giant expects the most growth,between 76 percent and 92 percent,for its business solutions business next year for the SMB segment, which includes applications from Great Plains, Navision and bCentral. "There is a lot of potential because it's such a fragmented market," Ballmer said during his annual keynote at the meeting.

Microsoft also expects between 18 percent and 22 percent growth of MSN business, 20 percent to 26 percent growth in its home and entertainment business and 14 percent growth for its CE/mobility unit, Connors said. Microsoft's Licensing 6.0 will help pump up revenue through fiscal year 2003 but will slow over time, he added.

The Licensing 6.0 deadline, on July 31, drove significant growth during the last quarter. "Annuity licensing is driving tremendous growth," Connors said about the 38 percent growth in unearned revenue from March 2002 through June 2002. "But don't expect this kind of percent growth rate in the future."

While the slowdown reflects a maturing of the software giant, Microsoft remains in good company: It is ranked second only to General Electric in total market capitalization, Connors said. In April 2000, it was ranked No. 3 under Cisco Systems and GE.