Microsoft Regains Momentum Driven by Unwavering Focus
Microsoft Corp., which last fall was licking its wounds after a federal judge ruled the company had violated antitrust laws, this year has regained its lofty status as one of America’s rare healthy tech companies.
Thursday’s decision by federal antitrust enforcers not to seek a breakup of Microsoft caps a banner year for the Redmond, Wash.-based software giant.
Microsoft’s stock is up nearly 30% since Dec. 31, making it the second-best performer in the laggard Dow Jones industrial average, which is down nearly 9% this year. The company is sitting on $31.5 billion in cash, and sales are up 9% while the rest of the tech sector is melting down.
Wall Street analysts are gushing over Microsoft’s year-old foray into making enterprise software that runs business computer systems, which has recently begun to pay off.
And two new consumer products will hit the market later this year. Microsoft hopes to leverage its Windows monopoly into new markets with its controversial Windows XP operating system, which includes instant messaging, a music and video player and digital photography software. And its billion-dollar investment in the new Xbox video game console is likely to keep the momentum going for the foreseeable future, analysts say.
“Last year, everyone was so focused on the [U.S. Justice Department] and their talk of a breakup,” said Melissa Eisenstat, managing director at CIBC World Markets in New York. “This year they’ve got a new product cycle kicking in. And they’ve got a Republican in the White House and a more favorable legal environment.”
Those factors have allowed Microsoft to do something that analysts consider remarkable in today’s harsh economic climate: The company is meeting--and sometimes exceeding--its own financial forecasts and the expectations of analysts.
“As we’ve had this dramatic decline in capital spending and investment in technology, Microsoft has surprised us,” said Jonathan Geurkink, a software analyst for Wells Fargo Van Kasper in Seattle. “Companies have seen their orders just fall off a cliff. Yet Microsoft has been able to plow ahead.”
Though PC sales are slowing, companies are upgrading the operating system software on millions of computers that are already on workers’ desks. That has boosted sales of Microsoft’s flagship Windows 2000.
At the same time, the software behemoth is expanding its reach with hard-core business software such as its Exchange server product for handling electronic mail and its SQL Server for database management.
Microsoft’s competitors, including Oracle Corp. and Sybase Inc., typically sell such software in packages priced between $150,000 and $1.5 million. Microsoft’s products typically sell for much less, said Aaron Scott, a software analyst with Tucker Anthony Sutro Capital Markets in Hartford, Conn.
The company also helped itself by targeting a broad customer base instead of focusing on dot-com start-ups and other high-tech clients, which can no longer afford expensive software, Geurkink said.
Elsewhere at Microsoft, product managers put the antitrust troubles out of their minds and concentrated on new products such as Windows XP and the Xbox game console.
“Everyone seems to be very focused,” said Kim Caughey, a research analyst with Parker/Hunter Inc. in Pittsburgh. “It’s a reflection on the culture of Microsoft.”
Analysts have high hopes for Windows XP, which represents a complete overhaul of Microsoft’s most critical product. The new operating system is being stamped onto CD-ROMs and loaded onto PCs and is expected to boost sales of new computers when it hits stores on Oct. 25.
Microsoft will introduce Xbox about two weeks later, and executives hope it will broaden the company’s reach into homes that don’t have--and don’t want--a PC. Analysts expect the $300 Xbox to be a money-loser at first, but sales of $50 video games over the long term should create an important recurring revenue stream.
Microsoft shares fell $1.72, or 3%, to close at $56.02 in Nasdaq trading Thursday after the announcement from the Justice Department. But analysts saw that as a relatively positive sign given the steep drop in the broad market. Without the positive news from the Bush administration, the stock probably would have taken a bigger hit, they said.
Though Microsoft’s performance has been impressive, its shares are off 36% from their high this year of $76.15 in late June. Overall, the shares have slumped 24% from a year ago, when the antitrust case spooked investors.
Still, Scott said, Microsoft is “a company that’s fundamentally sound. It’s a good stock to go to when there’s a flight to quality.”
