Arno and all,
Below is from Monday's IBD: (title is hilarious)
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Microsoft Keeps Whining But Analysts Are Unfazed
Date: 7/28/97 Author: Russ Britt
Microsoft Corp. plans to make fiscal '98 the year the empire strikes back.
Combative rhetoric has been flying between the Redmond, Wash.-based software giant and rivals Oracle Corp. and Sun Microsystems Inc. And now Microsoft is taking off the gloves and going in for the kill.
Last week, it revealed its strategy for boosting its position in the enterprise server software market. While it dominates the desktop and is winning over low- and mid-range server users with its Window NT operating system, Microsoft is looking to grow NT's stake in large
corporate accounts.
And Microsoft is talking the talk, firing back some of the barbs it has taken. Chairman and Chief Executive Bill Gates took issue with Sun's promotion of a slimmed-down network computer, or NC. Sun Chairman and Chief Executive Scott McNealy has said Windows-based PCs are too complex, referring to them on occasion as ''hairballs.''
''Sun is very pure in its belief that the PC is an evil thing,'' Gates said. ''It thinks the only key a user should be allowed to use is the backspace key.''
Microsoft is betting heavily that large corporations will want to use NT on large servers. At last week's analysts' conference, the company said it plans to hire 1,500 new employees for the enterprise server market over the next year, boosting its total from 5,500 to more than 7,000.
It is the largest portion of a companywide plan to beef up its forces. Overall, Microsoft plans to add 3,600 employees over the next year, a departure from its usual annual buildup of 2,500 workers.
The company says it is increasing spending on sales and marketing, which could hurt earnings growth. It also plans even more increases in research- and-development spending, which already has risen
from 13.1% of revenue in '94 to 16.9% in '97.
But analysts say they've heard cautionary tales from Microsoft before. They say Microsoft is likely to bring in much more than it will spend from its enterprise venture.
''I think they need to spend the money in order to be successful,'' said Melissa Eisenstat, an analyst with Oppenheimer & Co. in New York. Eisenstat normallycovers enterprise software vendors and recently added Microsoft to her area of responsibility.
''To work with enterprise customers, you need to put a face upfront,'' Eisenstat added. ''I don't know if (the added sales force) is enough long term, but maybe that's what they can handle this year.''
Microsoft is emboldened by its strong showing in the low- to mid-range server market thus far. In '96 it overtook Unix in unit sales, jumping more than 85% from its '95 level, says market research firm International Data Corp. of Framingham, Mass.
If Microsoft can make a similar move at the high end of the server market, it would capture some highly profitable business. Eisenstat says, however, that Microsoft has a long way to go before it will gain a significant foothold.
''Not many companies are ready to trust their systems to Microsoft,'' she said.
True to form, Microsoft was cautious about other prospects for the coming year. This year, the conservatism was underscored several times by a number of Microsoft officials. They're concerned over the
prospect of dwindling demand for PCs among new users.
Company officials say market penetration of PCs in homes seems to have flattened out at roughly 40%.
Chief Financial Officer Greg Maffei and other company officials warned that the upcoming release of Windows 98 is not likely to create huge interest. An update of its Windows 95 operating system, the software is in testing now and is due to ship early next year.
''None of us is projecting Windows 98 will be the blockbuster Windows 95 was,'' Maffei said.
Despite the seemingly dire predictions, analysts seemed unfazed. They expect the company to fulfill forecasts of earning $3.16 to $3.20 a share in fiscal '98.
For fiscal '97, which ended June 30, Microsoft earnings grew 54% to $2.63 a share on sales growth of 31% to $11.4 billion.
In early afternoon trading Friday, Microsoft's share price was up 1 3/4 to $139 3/4.
''They're overdoing the (warnings) on Windows 98 a little bit,'' said John Girton, an analyst with Van Kasper & Co. in San Francisco. ''And I think a lot of (Microsoft's) estimates are truly conservative for next year.''
Indeed, Microsoft did point out a number of other opportunities for the coming year. In its ongoing browser war with Netscape Communications Corp. of Mountain View, Calif., Microsoft says it has achieved 30% market share with its Internet Explorer.
That was up from near zero a year ago, Gates says.
Microsoft also is betting that such devices as Internet access boxes atop televisions will drive computing into more homes. Microsoft announced in April plans to buy WebTV Networks Inc. of Palo Alto, Calif., for $425 million, a deal that has yet to be finalized. WebTV makes a set-top box that lets buyers access the Web with their
TVs.
And as Microsoft talked of additional expenses, it also discussed how it has brought costs down. Bob Herbold, chief operating officer, says that while sales and marketing will rise in fiscal '98, in fiscal '97 it declined as a percentage of total sales to 25.2%, from 30.6% in
fiscal '96.
He says total operating expenses were 45.3% of sales in fiscal '97, down from 50.7% in '96. Conversion to delivering software on CD-ROMs from diskettes, combining sales and manufacturing operations and
increased outsourcing helped reduce costs, says Herbold.
Scott McAdams, an analyst with Ragen MacKenzie in Seattle, says even if Microsoft's current investments take a while to play out, it still will come out ahead in the long run.
''The worse they do in fiscal '98, the better they do in fiscal '99,'' McAdams said.
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I only hope Mr. Maffei will keep talking until I finish with my additional purchases of MSFT shares.
Regards,
Ibexx |
