Microsoft Touts R&D Plans And Taps CFOsMicrosoft Touts R&D Plans And Taps CFOs

When financial analysts came to Microsoft's campus last week for the lowdown on the company's strategy, a question on everyone's mind was what the developer plans to do with its horde of $50 billion in cash and short-term investments. They're still wondering.

Instead, Microsoft chief financial officer John Connors and other executives reflected 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 corporate spending on IT continues to be a wild card. "How much will that IT budget increase worldwide is question number one," Connors said.

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 he laid out the company's goals: winning more customers, improving customer satisfaction, and improving profitability. "Cost cutting--that's not the dream," Ballmer said.

One factor influencing Microsoft's business model will be 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, says Linux is already cutting into server sales and could do the same in desktop operating systems and applications. "Open source has the potential to commoditize intellectual property and, more specifically, the software market," Raisys says. "I don't think it's an overstated threat."

Still, Ballmer said Microsoft gained share in each of its business areas in the past year. Despite the growth of Linux, server sales were strong, increasing 17% in the quarter ended June 30 to $1.93 billion. And Windows Server 2003, released in April, is ramping up. The operating system was deployed at three times the rate of Windows 2000 in its first few months of availability.

Bill Gates, Microsoft's chairman and chief software architect, 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. 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 launch the first broad test of its next major operating system, code-named Longhorn. Microsoft will deliver versions of its System Management Server and Microsoft Operations Manager in fiscal 2004 and, later, combine those into a single product called System Center, said Eric Rudder, senior VP of servers and tools.

Reducing the cost and complexity of software patches and updates "is absolutely strategic for us," Gates said. The vendor plans to consolidate its Web pages for downloads into a single site, called Microsoft Update and add automatic-update capabilities to more products.

What about that $50 billion in reserves? Said Ballmer, "The money's being well taken care of."