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Microsoft Details Product Plans But Keeps Mum On Dividends And Buybacks

Bill Gates and other execs outline plans for $6.8 billion research and development budget, but the company won't say what it plans to do with its $50 billion in reserves.

When financial analysts came to Microsoft's campus July 24 for the low-down on the company's strategy, a key question on everyone's mind was what the company planned to do with its horde of $50 billion in cash and short-term investments. They're still wondering.

Citing the uncertain outcomes of a variety of legal entanglements Microsoft is involved in-which include a lawsuit by Sun Microsystems, an investigation by European regulators, and overcharge suits by several states, CFO John Connors said the company isn't ready to commit to further dividends or stock buybacks. "We would ask that [investors] be a little bit patient until we work our way through the litigation and the business model impact," Connors said.

Some analysts accepted that explanation, but not everyone. Microsoft's cash holdings are "excessive by any reasonable standard," said one attendee.

Instead, Connors and other Microsoft executives reflected back on the company's results for fiscal 2003, which ended June 30, and looked ahead to the current year. They anticipate revenue growth in each of the company's product segments and improving margins in the four business areas that lost money last year: Business Solutions, MSN, mobile and embedded devices, and home and entertainment.

Sales growth will be helped by anticipated increases in the number of PCs and Intel servers shipped, but business spending on IT continues to be a wild card. "How much will that IT budget increase worldwide is question number one," Connors said. Microsoft will attempt to gain greater acceptance for its Software Assurance licensing program by providing improved support and cost predictability, he added.

In an effort to exercise greater fiscal discipline, Microsoft has assigned CFOs to each of its business units. Their focus will be on better decision making, not cost reduction, as CEO Steve Ballmer made clear when laid out the company's goals: winning more customers, improving customer satisfaction, and improving profitability. "Cost cutting--that's not the dream," Ballmer said.

Going forward, one factor influencing Microsoft's business model will the degree to which the open-source movement undercuts demand for commercial software. "Will software be a business of innovation and value or will it become a business that gets commoditized by clones, free alternatives?" Ballmer said.

Victor Raisys, an analyst with SoundView Technology Group, said Linux is "a huge threat" for Microsoft because it's already cutting into server sales and could eventually do the same in desktop operating systems and applications. "Open source has the potential to commoditize intellectual property and more specifically the software market," he said. "I don't think it's an overstated threat."

Still, Ballmer said Microsoft gained share in several its of its business areas in the past year. Server sales were particularly strong, growing 17% in the quarter ended June 30 to $1.93 billion. And Windows Server 2003, released in April, is off to a strong start. The operating system was deployed at three times the rate of Windows 2000 in its first few months of availability, the company said.

Bill Gates gave an overview of the company's development projects, which will be fueled in the current fiscal year by $6.9 billion in spending on research and development, an 8% increase over last year. "There's a strong product pipeline," Microsoft's chairman and chief software architect said.

Products to be delivered over the next 12 months include Office 2003, an upgrade to the Tablet PC operating system, versions of Windows Server 2003 and Office 2003 for small businesses, Services For Unix 3.5, and upgrades to many of its server products.

In 2004, Microsoft will also launch the first broad beta test of its next major operating system, code-named Longhorn. And Eric Rudder, senior VP of servers and tools, said Microsoft will also deliver new versions of its System Management Server and Microsoft Operations Manager and, later, combine those products into a single platform called System Center.

The vendor is working on a number of fronts to make it easier for customers to deploy software patches. It plans to consolidate its various Web pages for downloads and patches into a single site called Microsoft Update, while adding automatic-update capabilities to more products. Reducing the cost and complexity of software patches and updates "is absolutely strategic for us," Gates said.

Microsoft entered fiscal 2004 in a position "to continue the momentum," Connors said. And what about that $50 billion in reserve? Said Ballmer, "The money's being well taken care of."

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